18.7 Backwards induction We know the value of the option at the final nodes We work back through the tree using risk-neutral valuation to calculate the value of the option at each node, testing for early exercise when appropriate Options, Futures, and Other Derivatives, 5th edition C 2002 by John C Hull18.7 Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull Backwards Induction • We know the value of the option at the final nodes • We work back through the tree using risk-neutral valuation to calculate the value of the option at each node, testing for early exercise when appropriate