ABSTRACT
The first major advance in option pricing was made by Black and Scholes (1973).Arguably the next was made by Cox et al. (1979), and takes the form of the binomial model. Black-Scholes models are, strictly speaking, applicable only to options that cannot be exercised before expiry (i.e. European-style options). Binomial models can deal with the possibility of early exercise, and hence can be used for the valuation of American-style options.Another advantage of binomial models, relative to Black-Scholes models, is that they are capable of allowing for variations in interest rates and volatility over time.
