The Italian Market for ‘Premium’ Contracts: An Application of Option Pricing Theory

Despite their growing importance on Italian stock exchanges, premium contracts have not received very much attention in analytical studies. This paper starts with a description of the working of the market for premium contracts with the aim of highlighting its institutional peculiarities compared with foreign markets for stock options and then develops a formula for the determination of premia based on arbitrage methods similar to those used in option pricing theory. The empirical test of the correspondence between actual market premia and the theoretical values obtained provides some indication of the scope for arbitrage between premium and forward contracts, and hence of the efficiency of Italian stock exchange markets.