Press Release
Principia Enhances Equity Based Option Capabilities
Innovative algorithm incorporates volatility smiles and volatility regimes to accurately model a wide variety of exotic options
New York, January 16, 2001 – Principia Partners LLC, a leading provider of full front-to-back office systems for global markets, today announced the significant enhancement of its equity based option capabilities in the new release of the Principia Analytic System. With this enhancement, Principia Partners is setting extraordinary new standards for accuracy and reliability of option pricing in the vendor-supplied financial software market.
PAS now includes volatility surfaces data in its market environment for equity-based options. Users can override the volatility surface, adjust dividend yields and volatilities to match input option prices, and interpolate/extrapolate volatilities by "moneyness." Users also can incorporate their views on the prevailing volatility regime by selecting the sticky strike model, sticky delta model or sticky implied tree model for hedging and scenario analysis.
PAS employs the implied tree model to capture the market's expectation of the future dynamics of the underlying that is implicit in the whole volatility surface. The model replicates the implied distributions of the underlying from volatility skews and smiles, which are significantly different from the lognormal distributions of the Black-Scholes model. This enables PAS to price and manage option risk far more accurately than alternatives employing the traditional Black-Scholes approach.
Principia's innovative research has yielded a new implied trinomial tree algorithm that excels over other published models in terms of accuracy, robustness, speed and flexibility. The algorithm is able to tolerate extreme variations of local volatilities and avoid negative probabilities, and match benchmark option prices exactly as long as those option prices do not contain arbitrage opportunities. The algorithm puts all relevant dates on the time axis, and treats probability distributions as continuous. The result is more stable pricing and reliable risk analytics across a wide variety of equity based options.
PAS covers complex exotic structures including Asian options, lookback options, double barrier options, digital options, compound options and more. Asians and lookbacks can have either fixed or floating strikes. Barrier monitoring, averaging/lookback fixing, and Bermudan exercise be partial time or on an arbitrary discrete schedule. Quanto and deferred strike setting features are also supported.
Brian Donnally, one of Principia's founding partners, says: "The work we have carried out on this new pricing model is unique, providing modelling capabilities that have never before been commercially available to the market. We have a strong commitment to designing and developing strategies for a highly complex derivatives market, and we have the systems architecture to provide the scalability and flexibility to support these instruments on a global basis. Principia focuses on continually developing new ideas, and we strive to provide customers with the highest quality product available."
PAS is a unique turnkey product that provides portfolio analysis, risk management, hedging and VaR, in addition to full accounting functionality capable of meeting international reporting standards such as FAS133 and IAS39. All derivative and structured product trades are captured in the front office and seamlessly transferred to the PAS back office and general ledger functions for trade processing and settlement. With its unified design, Principia can provide a truly integrated front-to-back office solution for handling complex instruments.
About Principia Partners
Founded by a group of finance and technology professionals, Principia
Partners offers a fully integrated front to back office solution
for management of financial assets, liabilities and derivatives.
The Principia Analytic System covers fixed-income (including ABS/MBS),
FX and equity based products. The sub-ledger facilitates full compliance
with both FAS 133 and IAS 39 accounting regulations. Principia's
target market is composed of end-users, dealers, fund managers and
other entities that require sophisticated processing capability without
the desire or resources to develop internal systems. For more information
about Principia, see www.principiapartners.com.
For press information contact:
Shamira Alidina
Write Image
271 Regent Street
London W1B 2BP
shamira@write-image.co.uk
Tel: + 44 (0) 20 7959 5450
Fax: + 44 (0) 20 7493 5499
Email: shamira@write-image.co.uk