Cox, Ross, & Rubinstein Option-Pricing Model

Definition

Mathematical formula for estimating the value of an American option (exercisable at any time up to the expiration date). Used in determining if the early exercise of the option is advisable, it (unlike the Black-Scholes option pricing model) assumes that the price of the underlying asset follows binomial distribution. It divides the time to expiration into a certain number of intervals over which the price of the underlying contract is allowed to move up or down according to a specified probability. Invented in 1979 by the US mathematicians John Cox, Stephen Ross, and Mark Rubinstein.