In this paper we study a binomial model with random time steps and explain how to calculate values for European and American call and put options. We prove both weak convergence of the discrete processes to the Black}Scholes setup and convergence of the values for European and American put options. Computational experiments exhibit a smooth convergence structure and suggest that we can obtain a...

A term structure of interest rates is introduced to model a more realistic econ omy in which deposit rates can vary with the duration of loans We will also study time inhomogeneity of the volatility process by introducing a term structure of volatilities Time dependent volatilities are useful to incorporate into the pricing model the market s expectations about risk across time Information abou...

We generalize the classical binomial approach of the model of Black and Scholes to a Markov binomial approach. This leads to a new formula for the cost of an option.