US 7,065,475 B1 · Modeling option price dynamics

Abstract

This invention presents a method for pricing an option. The steps for this method include configuring a general option pricing model with parameters to conform the model to a market behavior of an underlying asset. A price for an option is then calculated using the model. The configured model can be calibrated to implied volatility data describing the current state of the market. The underlying asset can include commodity prices, interest rates, and currency exchange rates. More than one general option pricing models can be used to price the option. Additionally, correlations between the general option pricing models can be included in the calculation. The configuring of the parameters can be done through the formula: dF ⁡ ( t , ⁢ T ) F ⁡ ( t , T ) = ∑ a ⁢ [ ∑ i ⁢ y ia ⁢ B i ⁡ ( t , T ) ⁢ g i ⁡ ( T ) ] ⁢ σ a ⁡ ( t ) ⁢ dz a ⁡ ( t ) , wherein F(t, T) represents the value of the underlying asset and dF(t, T) represents a change in the value of the underlying asset; a represents randomness factors; i represents an amount of mean reversion factors used in the model; t represents the current time; T represents the forward time; yia represents the move shape coefficient; Bi(t, T) represents the mean reversion factor; gi(T) represents the volatility adjustment factor; σa(t) represents the instantaneous factor volatility; and dza(t) represents the random increment.

Claims9

Dependent claims

A computer-implemented method for pricing an option comprising:

(a) calculating in a computer the formula:
dF
⁡
(
t
,
⁢
T
)
F
⁡
(
t
,
T
)
=
∑
a
⁢
[
∑
i
⁢
y
ia
⁢
B
i
⁡
(
t
,
T
)
⁢
g
i
⁡
(
T
)
]
⁢
σ
a
⁡
(
t
)
⁢
dz
a
⁡
(
t
)
,
wherein F(t, T) represents the value of the underlying asset and dF(t, T) represents a change in the value of the underlying asset;
i represents an amount of mean reversion factors used in the model;
t represents the current time;
T represents the forward time;
yia represents the move shape coefficient;
Bi(t, T) represents the mean reversion factor;
gi(T) represents the volatility adjustment factor;
σa(t) represents the instantaneous factor volatility;
and
dza(t) represents the random increment;
a represents the index enumerating the random increments dza(t);
and
(b) calculating in a computer a price of an option based on the calculated results of the formula.

68 more elements

Dependencies are inferred from the claim text.

Modeling option price dynamics

Life of this patent

Modeling option price dynamics

Life of this patent

Abstract

Claims9