#### Overview of this book

Python for Finance
Credits
Acknowledgments
www.PacktPub.com
Preface
Free Chapter
Introduction and Installation of Python
13 Lines of Python to Price a Call Option
Introduction to Modules
Statistical Analysis of Time Series
Index

## Binomial tree (the CRR method) and its graphical representation

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 plt
xlim(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))
plt.axis('off')
```

The following is its corresponding graph:

Obviously, the simplest tree is a one-step tree. Assume that today's price is \$10, the exercise price is \$11, and a call option would mature in six months. In...