Modeling option price dynamics

Details Modeling option price dynamics Modeling option price dynamics

2006-06-20

2006-06-20

Paladini, Albert W. (Department: 2125)

Data processing: structural design, modeling, simulation, and em

Modeling by mathematical expression

C705S037000

Reexamination Certificate

active

07065475

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⁢yia⁢Bi⁡(t,T)⁢gi⁡(T)]⁢σa⁡(t)⁢dza⁡(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; yiarepresents 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.

REFERENCES:
patent: 5812988 (1998-09-01), Sandretto
patent: 6546375 (2003-04-01), Pang et al.
patent: 6625584 (2003-09-01), Bains et al.
patent: 6643631 (2003-11-01), Heyde

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