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Hard · derivatives · Quant Researcher interview question · options, pricing, dynamic-programming, numpy
The Cox-Ross-Rubinstein (CRR) binomial tree model is a fundamental numerical method used to price American options, which allow for early exercise prior to expiration. By modeling asset price evolution as a recombining tree, this approach utilizes backward induction to compare the intrinsic value of immediate exercise against the continuation value of holding the option at each node. This technique is critical in quantitative finance for valuing derivatives where closed-form solutions are unavai