Cox-Ross-Rubinstein Model

The Cox-Ross-Rubinstein (CRR) model is a method used to estimate the potential future prices of a financial option by simulating possible stock price movements over time. It breaks down a timeframe into small steps, where the stock can either go up or down by certain factors, with probabilities assigned to each move. This binomial approach creates a "tree" of possible outcomes, allowing investors to evaluate the option's value today based on possible future scenarios, considering factors like volatility and interest rates. It provides a manageable, structured way to price options with more realistic assumptions than earlier models.