System and method for option pricing using a modified black scholes option pricing model

• US 20020178101A1
• Filed: 05/22/2002
• Published: 11/28/2002
• Est. Priority Date: 05/24/2001
• Status: Abandoned Application

• Current Assignee: Swift, Lawrence W.
• Original Assignee: Swift, Lawrence W.
• Inventors: Swift, Lawrence W.
• Application Number:
  US10/153,751
• Publication Number:
  US 20020178101A1
• Time in Patent Office: Days
• US Class Current: 705/36
• CPC Class Codes: G06Q 40/02 Banking, e.g. interest calculation or account maintenance credit or loans G06Q40/03
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

A modified Black-Scholes algorithm used for pricing options. While the Black-Scholes algorithm has been a mainstay in the financial world, its assumptions do not accurately reflect the marketplace of long-term options, and other securities and assets. Since markets tend to rise over time, the existing Black-Scholes algorithm tends to underprice and undervalue options and other securities due to the model'"'"'s assumption of normal distribution. The system and method of the present invention corrects for assumptions in the Black-Scholes Algorithm by accounting for the long-term bias of markets to increase over the long-term.

Claims

1. A method for determining the long-term value of an option comprising:

determining an expected value of the option using the Black-Scholes model; and

adjusting the expected value by applying a factor to the expected value to reflect the propensity of the asset underlying the option to increase or decrease in value over time to determine the long-term value of the option to arrive at an adjusted expected value.

2. The method of claim 1 wherein adjusting the expected value by applying a factor to the expected value to reflect the propensity of the asset underlying the option to increase or decrease in value over time further comprises incorporating an additional argument into the Black-Scholes model.

3. The method of claim 1 wherein adjusting the expected value by applying a factor to the expected value to reflect the propensity of the asset underlying the option to increase or decrease in value over time further comprises adjusting at least one variable of the Black-Scholes model.

4. The method in claim 1 wherein the option is an option to buy or sell stock.

5. The method in claim 1 wherein the option is an insurance policy.

6. The method in claim 4 wherein the factor that reflects the propensity of the asset underlying the option to increase or decrease in value is determined by deriving the slope of a stock market index curve in which the underlying stock is listed.

7. The method of claim 4 wherein the factor that reflects the propensity of the asset underlying the option to increase or decrease in value is determined by deriving the slope of an industry specific stock market index curve representing the industry of the corporation the stock of which is the basis for the option.

8. The method of claim 4 wherein the factor that reflects the propensity of the asset underlying the option to increase or decrease in value is determined by deriving the slope of a curve representing the historical performance over time of the stock of the corporation which is the basis for the option.

9. An option valuation computer, the option evaluation computer comprising:

a processor,

a display device,

a storage device, and

a memory, the memory comprising software instructions, the software instructions comprising instructions for;

determining an expected value of the option using the Black-Scholes model;

adjusting the expected value by applying a factor to the expected value to reflect the propensity of the asset underlying the option to increase or decrease in value over time to determine the value of the option; and

displaying the expected value as adjusted on the display device.

10. The option valuation computer of claim 9 wherein the instructions for adjusting the expected value by applying a factor to the expected value to reflect the propensity of the asset underlying the option to increase or decrease in value over time further comprises instructions for incorporating an additional argument into the Black-Scholes model.

11. The option valuation computer of claim 9 wherein the instructions for adjusting the expected value by applying a factor to the expected value to reflect the propensity of the asset underlying the option to increase or decrease in value over time further comprises instructions for adjusting at least one variable of the Black-Scholes model.

12. The option valuation computer of claim 9 wherein the option is an option to buy or sell stock.

13. The option valuation computer of claim 9 wherein the option is an insurance policy.

14. The option valuation computer of claim 12 wherein the factor that reflects the propensity of the asset underlying the option to increase or decrease in value is determined by deriving the slope of a stock market index curve in which the underlying stock is listed.

15. The option valuation computer of claim 12 wherein the factor that reflects the propensity of the asset underlying the option to increase or decrease in value is determined by deriving the slope of an industry specific stock market index curve representing the industry of the corporation the stock of which is the basis for the option.

16. The option valuation computer of claim 12 wherein the factor that reflects the propensity of the asset underlying the option to increase or decrease in value is determined by deriving the slope of a curve representing the historical performance over time of the stock of the corporation which is the basis for the option.

18. The option valuation server for valuing an option over a network according to claim 17 wherein the network is selected from the group consisting of the Internet, intranet, local area networks (LANS), wide area networks (WANS), and a wireless network.

19. The option valuation server for valuing an option over a network according to claim 17 wherein the network comprises a plurality of interconnected networks.

20. The option valuation server of claim 17 wherein the instructions for adjusting the expected value by applying a factor to the expected value to reflect the propensity of the asset underlying the option to increase or decrease in value over time further comprises instructions for incorporating an additional argument into the Black-Scholes model.

21. The option valuation server of claim 17 wherein the instructions for adjusting the expected value by applying a factor to the expected value to reflect the propensity of the asset underlying the option to increase or decrease in value over time further comprises instructions for adjusting at least one variable of the Black-Scholes model.

22. The option valuation computer of claim 17 wherein the option is an option to buy or sell stock.

23. The option valuation computer of claim 17 wherein the option is an insurance policy.

24. The option valuation computer of claim 22 wherein the factor that reflects the propensity of the asset underlying the option to increase or decrease in value is determined by deriving the slope of a stock market index curve in which the underlying stock is listed.

25. The option valuation computer of claim 22 wherein the factor that reflects the propensity of the asset underlying the option to increase or decrease in value is determined by deriving the slope of an industry specific stock market index curve representing the industry of the corporation the stock of which is the basis for the option.

26. The option valuation computer of claim 22 wherein the factor that reflects the propensity of the asset underlying the option to increase or decrease in value is determined by deriving the slope of a curve representing the historical performance over time of the stock of the corporation which is the basis for the option.

17. An option valuation server for valuing an option over a network, the option evaluation server comprising:

a processor,

a network to which the processor is connected,

a storage device connected to the process, and

a memory, the memory including software instructions, the software instructions comprising instructions for;

receiving over the network information relating to an option as required to determining an expected value using the Black-Scholes model;

adjusting the expected value by applying a factor to the expected value to reflect the propensity of the asset underlying the option to increase or decrease in value over time;

returning the expected value of the option as adjusted over the network.