ERCIM News No.38 - July 1999

Premia: An Option Pricing Project

by Claude Martini and Antonino Zanette

The main purpose of the Premia consortium is to provide routines for pricing financial derivative products together with scientific documentation. The Premia project is carried out at INRIA and CERMICS (Centre d’Enseignement et de Recherche en Mathématiques, Informatique et Calcul Scientifique).

The Premia project focuses on the implementation of numerical analysis techniques to compute the quantities of interest rather than on the financial context. It is an attempt to keep track of the most recent advances in the field from a numerical point of view in a well-documented manner. The ultimate aim is to assist the R&D professional teams in their day-to-day duty. It may also be useful for academics who wish to perform tests on a new algorithm or pricing method without starting from scratch.

The Premia project is three-fold:

The most valuable component of this project is the documentation which makes use of the scientific and numerical knowledge of our institutions. This documentation will complement in an important way books devoted to theoretical option pricing. The routines themselves come in second. We feel that on a given pricing issue some other professional R&D team will certainly have much better and competitive software or algorithm. Nevertheless on the average Premia should be of interest to them. Lastly the object-oriented software is only there to provide an easy way to test things. It was mainly designed for the use of the Premia team. Thus, Premia is more attractive than a plain library of C routines.

Current State and Perspectives

We have already programmed and documented a fairly large set of routines computing the prices and the hedges of stock options. These routines use mainly explicit, lattice or finite difference methods. Current work deals with Monte-Carlo and quasi-Monte-carlo methods. We plan to start implementing algorithms for interest rate options in early 2000.

This project is funded by a group of financial institutions called the Premia consortium. Members of the consortium are Crédit Agricole Indosuez, Crédit Lyonnais, Caisse Centrale des Banques Populaires, Union Européenne du CIC, Caisse des Dépots et Consignations. The funding members have access to the complete software with the source and the documentation. Other interested financial institutions are welcome to join the consortium.

A web site describing in more detail the aims of the project and the way to join the consortium is available at:

Please contact:

Claude Martini - INRIA
Tel: +33 1 39 63 51 01

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