Markov and semi-Markov option pricing models with arbitrage possibility

The aim of this paper is the presentation of new models for option pricing that are discrete in time and in the framework of Markov and semi-Markov processes as an alternative to the classical Cox–Rubinstein model, and that also allow the possibility of arbitrage. Both cases of European and American options are considered and possible extensions are given. © 1997 by John Wiley & Sons, Ltd.