Principia Partners has launched an upgraded version of its Principia Analytic System (PAS) featuring enhanced equity based option pricing capabilities.
The new module uses a single pricing model for all vanilla and structured exotic products, says Principia, resulting in stable pricing and reliable risk management analytics across a wide variety of equity index options. The algorithm used overcomes the inaccuracies which have dogged the application of Black & Scholes to complex structures, claims Principia founder Woodward Hoffman.
With the new pricing model, dealers can be confident that their hedging instruments are calculated correctly, and hedge parameters can be customised and developed to incorporate the dealers' views on market volatility moves, he adds.
The Principia algorithm is able to tolerate extreme variations of local volatilities, avoid negative probabilities, and match benchmark option prices exactly, the company boasts. The module covers complex exotic structures including Asian options, lookback options, double barrier options, digital options, compound options and more.
Hoffman claims the algorithm sets new standards for accuracy and reliability of option pricing and goes "far beyond any method published to date".