Method and system for creating and trading derivative investment products based on a statistical property reflecting the variance of an underlying asset

A computer-implemented method of calculating and disseminating a value of an underlying asset associated with at least one limited risk variance derivative, the method comprising:

• calculating, with a processor, from a plurality of pari-mutuel auctions, a capped value for a statistical property reflecting the variance of the underlying equity, the capped value comprising a value and a cap, the value reflecting an average volatility of price returns of the underlying equity over a predefined time period and the cap reflecting a maximum value of the value reflecting the average volatility of price returns of the underlying equity over the predefined time period;
• calculating, with the processor, an average of a summation of each squared daily return of the underlying equity included in the value for the statistical property reflecting the variance of the underlying equity;
• displaying, with the processor, at least one limited risk variance derivative based on the statistical property reflecting variance of the underlying equity on a trading facility display device coupled to a trading platform;
• transmitting, with the processor, at least one limited risk variance derivative quote of a liquidity provider from the trading facility to at least one market participant;
• and
• settling, with the processor, the at least one limited risk variance derivative based on the capped value and a difference between a cumulative realized variance and a strike price set at a fixed second cumulative realized variance, wherein the strike price is set at the fixed second cumulative realized variance when the at least one limited risk variance derivative is created.

A computer-implemented method of creating a limited risk derivative product, the method comprising:

• with a processor in a trading platform:
• calculating a realized variance of an underlying equity;
• creating the limited risk derivative associated with the underlying equity based on the realized variance of the underlying equity, the limited risk derivative product comprising a capped value for a statistical property reflecting the variance of the underlying equity and an average of a summation of each squared daily of the underlying equity included in the capped value for the statistical property reflecting the variance of the underlying equity;
• and
• displaying limited risk derivative and the statistical property reflecting the variance of the underlying equity on a trading platform display device coupled with the trading platform;
• wherein the capped value for the statistical property reflecting the variance of underlying equity comprises a value and a cap, the value reflecting an average volatility of price returns of the underlying equity over a predefined time period and the cap reflecting a maximum value of the value reflecting the average volatility of price returns of the underlying equity over the predefined time period;
• and
• wherein the limited risk derivative product is settled based on the capped value and a difference between a cumulative realized variance and a strike price set at a fixed second cumulative realized variance, wherein the strike price is set at the fixed second cumulative realized variance when the limited risk derivative product is created.

A trading system comprising:

• a display device;
• a memory device storing a set of instructions;
• and
• a processor in communication with the display device and the memory device, the processor configured to execute the set of instructions stored in the memory and to:
• calculate a realized variance of an underlying equity;
• create the limited risk derivative associated with the underlying equity based on the realized variance of the underlying equity, the limited risk derivative product comprising a capped value for a statistical property reflecting the variance of the underlying equity and an average of a summation of each squared daily of the underlying equity included in the capped value for the statistical property reflecting the variance of the underlying equity;
• and
• display the limited risk derivative and the statistical property reflecting the variance of the underlying equity on a trading platform display device coupled with the trading platform;
• wherein the capped value for the statistical property reflecting the variance of underlying equity comprises a value and a cap, the value reflecting an average volatility of price returns of the underlying equity over a predefined time period and the cap reflecting a maximum value of the value reflecting the average volatility of price returns of the underlying equity over the predefined time period;
• and
• wherein the limited risk derivative product is settled based on the capped value and a difference between a cumulative realized variance and a strike price set at a fixed second cumulative realized variance, wherein the strike price is set at the fixed second cumulative realized variance when the limited risk derivative product is created.