20.17 Why the approach Works This approach works for lookback options because The payoff depends on just 1 function of the path followed y the stock price. We will refer to this as a path function The value of the path function at a node can be calculated from the stock price at the node& from the value of the function at the immediately preceding node The number of different values of the path function at a node does not grow too fast as we increase the number of time steps on the tree Options, Futures, and other Derivatives, 5th edition 2002 by John C. HullOptions, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 20.17 Why the Approach Works This approach works for lookback options because • The payoff depends on just 1 function of the path followed by the stock price. (We will refer to this as a “path function”) • The value of the path function at a node can be calculated from the stock price at the node & from the value of the function at the immediately preceding node • The number of different values of the path function at a node does not grow too fast as we increase the number of time steps on the tree