The tree will have four levels (corresponding to the four months) and five nodes at each level (corresponding to the stock price ranging from 5900 to 6700 in increments of 200).

At the final level (T=3 months), we can calculate the payoff of the put option for each node using the formula:

payoff = max(K - S, 0) where:

K is the strike price (6000) S is the stock price at that node

Node 1: payoff = max(6000 - 5900, 0) = 100 Node 2: payoff = max(6000 - 6100, 0) = 0 Node 3: payoff= max(6000 - 6300, 0) = 700 Node 4: payoff = max(6000 - 6500, 0) = 1500 Node 5: payoff = max(6000 - 6700, 0) = 2700

how do we get the values for each node manually?

Answer rating: 100% (QA)

Okay here are the steps to build the binomial tree manually 1 Start at the fin... View the full answer