The binomial tree method was proposed by *Cox*, *Ross*, and *Robinstein* in 1979. Because of this, it is also called the CRR method. Based on the CRR method, we have the following two-step approach. First, we draw a tree, such as the following one-step tree. If we assume that our current stock value is `S`

, there are two outcomes `S*u`

and `S*d`

, where `u`

> 1 and `d`

< 1, as shown in the following code:

import matplotlib.pyplot as pltxlim(0,1)plt.figtext(0.18,0.5,'S')plt.figtext(0.6,0.5+0.25,'Su')plt.figtext(0.6,0.5-0.25,'Sd')plt.annotate('',xy=(0.6,0.5+0.25), xytext=(0.1,0.5), arrowprops=dict(facecolor='b',shrink=0.01))plt.annotate('',xy=(0.6,0.5-0.25), xytext=(0.1,0.5), arrowprops=dict(facecolor='b',shrink=0.01)) ...

Start Free Trial

No credit card required