The CoxRubenstein (or CoxRossRubenstein) binomial option pricing model is a variation of the original BlackScholes option pricing model. It was first proposed in 1979 by financial economists/engineers John Carrington Cox, Stephen Ross and Mark Edward Rubenstein. The model is popular because it considers the underlying instrument over a period of time, instead of just at one point in time, by using a lattice based model.
A lattice model takes into account expected changes in various parameters over an option's life, thereby producing a more accurate estimate of option prices than created by models that consider only one point in time. Because of this, the CoxRossRubenstein model is especially useful for analyzing American style options, which can be exercised at any time up to expiration (European style options can only be exercised upon expiration).
The CoxRossRubenstein model uses a riskneutral valuation method. Its underlying principal purports that when determining option prices, it can be assumed that the world is risk neutral and that all individuals (and investors) are indifferent to risk. In a risk neutral environment, expected returns are equal to the riskfree rate of interest.
The CoxRossRubenstein model makes certain assumptions, including:
 No possibility of arbitrage; a perfectly efficient market
 At each time node, the underlying price can only take an up or a down move and never both simultaneously
The CoxRossRubenstein model is a twostate (or twostep) model in that it assumes the underlying price can only either increase (up) or decrease (down) with time until expiration. Valuation begins at each of the final nodes (at expiration) and iterations are performed backwards through the binomial tree up to the first node (date of valuation). In very basic terms, the model involves three steps:
 The creation of the binomial price tree
 Option value calculated at each final node
 Option value calculated at each preceding node
Figure 6: The CoxRossRubenstein model applied to an Americanstyle options contract, using the Options Industry Council\'s online pricing calculator. 
Options Pricing: Put/Call Parity

Trading
Breaking Down The Binomial Model To Value An Option
Find out how to carve your way into this valuation model niche. 
Investing
Using Decision Trees In Finance
These decisionmaking tools play an integral role in corporate finance and economic forecasting. 
Trading
The Anatomy of Options
Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio. 
Trading
Circumvent Limitations of BlackScholes Model
Mathematical or quantitative modelbased trading continues to gain momentum, despite major failures like the financial crisis of 200809, which was attributed to the flawed use of trading models. ... 
Investing
Examples To Understand The Binomial Option Pricing Model
Binomial option pricing model, based on risk neutral valuation, offers a unique alternative to BlackScholes. Here are detailed examples with calculations using Binomial model and explanation ... 
Trading
How To Build Valuation Models Like BlackScholes (BS)?
Want to build a model like BlackScholes? Here are the tips and guidelines for developing a framework with the example of the BlackScholes model. 
Investing
Understanding the BlackScholes Model
The BlackScholes model is a mathematical model of a financial market. From it, the BlackScholes formula was derived. The introduction of the formula in 1973 by three economists led to rapid ... 
Investing
The Volatility Surface Explained
Learn about stock options and the "volatility surface," and discover why it is an important concept in stock options pricing and trading. 
Small Business
What is a Business Model?
Business model is the term for a company’s plan as to how it will earn revenue.