Method and system for pricing options

• US 20030208430A1
• Filed: 03/27/2003
• Published: 11/06/2003
• Est. Priority Date: 04/13/2000
• Status: Active Grant

• Current Assignee: SuperDerivatives, Inc.
• Original Assignee: SuperDerivatives, Inc.
• Inventors: Gershon, David
• Granted Patent: US 7,315,838 B2
• Time in Patent Office: Days
• US Class Current: 705/36
• CPC Class Codes: G06Q 30/08 Auctions
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis
• CPC Class Codes: H04N 21/2543 Billing , e.g. for subscription services payment schemes, architectures or protocols G06Q20/00; e-commerce G06Q30/00; arrangements for billing for the use of broadcast information or broadcast-related information H04H60/21

Abstract

A method for providing a bid price and/or an offer price of an option relating to an underlying asset, the method including the steps of receiving first input data corresponding to a plurality of parameters defining the option, receiving second input data corresponding to a plurality of current market conditions relating to the underlying value, computing a corrected theoretical value of the option based on the first and second input data (110), computing a bid/offer spread of the option based on the first and input data (116), computing a bid price and/or an offer price of the option based on the corrected theoretical value and the bid/offer spread (118), and providing an output corresponding to the bid price and/or the offer price of the option.

Claims

1. A method for providing a bid price and/or an offer price of an option on an underlying asset, comprising the steps of:

receiving first input data corresponding to a plurality of parameters defining said option;

receiving second input data corresponding to a plurality of current market conditions relating to said underlying asset;

computing a corrected theoretical value of said option based on said first and second input data;

computing a bid/offer spread of said option based on said first and second input data;

computing a bid price and/or an offer price of said option based on said corrected TV and said bid/offer spread;

providing an output corresponding to the bid price and/or the offer price of said option.

2. A method according to claim 1 wherein said first input data comprises an indication of at least one parameter selected from the group including a type of said option, an expiration date of said option, and a trigger for said option.

3. A method according to claim 1 or claim 2 wherein said second input data comprises an indication of at least one market condition selected from the group including a spot value, an interest rate, a volatility, an at-the-money volatility, a 25 delta risk reversal, a 25 delta butterfly, and a 25 delta strangle.

4. A method according to any of claims 1-3 wherein the step of computing said corrected theoretical value comprises the steps of:

computing a theoretical value (TV) of said option based on at least part of said first and second input data; and

correcting said TV based on at least part of said first and second data to yield said corrected TV.

5. A method according to claim 4 wherein the step of correcting said TV comprises the steps of:

computing a plurality of TV corrections based on at least part of said first and second input data; and

applying said plurality of TV corrections to said TV.

6. A method according to claim 5 wherein at least one of said plurality of TV corrections is a function of at least one factor related to a risk associated with said option.

7. A method according to claim 6 wherein said plurality of TV corrections comprise at least one correction selected from the group including a convexity correction, a risk reversal correction, a shift correction, a gearing correction, a Vega correction, and an intrinsic value correction.

8. A method according to any of claims 5-7 wherein the step of applying said TV corrections to said TV comprises the steps of:

computing a TV correction weight associated with each of said TV corrections based on at least part of said first and second data;

multiplying each of said TV corrections by the associated TV correction weight yielding corresponding weighted TV corrections; and

adding said weighted TV corrections to said TV.

9. A method according to claim 8 wherein at least one of said TV correction weights is time dependent.

10. A method according to any of claims 1-9 wherein the step of computing said bid/offer spread comprises the steps of:

computing a base value for the bid/offer spread using at least part of said first and second input data; and

correcting said base value using at least part of said first and second data to yield said bid/offer spread.

11. A method according to claim 10 wherein the step of correcting said base value comprises the steps of:

computing a plurality of bid/offer spread corrections based on at least part of said first and second input data; and

applying said plurality of bid/offer spread corrections to said base value.

12. A method according to claim 11 wherein at least one of said plurality of bid/offer spread corrections is a function of at least one factor related to a risk involved in said option.

13. A method according to claim 12 wherein said plurality of bid/offer spread corrections comprise at least one correction selected from the group including convexity correction, risk reversal correction, shift correction, gearing correction, Vega correction, and intrinsic value correction.

14. A method according to any of claim 11-13 wherein the step of applying said bid/offer spread corrections to said base value comprises the steps of:

computing a bid/offer spread correction weight corresponding to each of said bid/offer spread corrections;

multiplying each of said bid/offer spread corrections by the corresponding bid/offer spread correction weight yielding weighted bid/offer spread corrections; and

adding said weighted bid/offer spread corrections to said base value.

15. A method according to claim 14 wherein at least one of said bid/offer spread correction weights is time dependent.

16. A method according to any of claims 1-15 wherein said underlying asset comprises a financial asset.

17. A method according to claim 16 wherein said option is a foreign exchange (FX) option.

18. A method according to claim 17 wherein said FX option is a Vanilla option.

19. A method according to any of claims 1-16 wherein said option comprises an option-like financial derivative.

20. A method according to any of claims 1-17 or 19 wherein said option is an exotic option.

21. A system for providing a bid price and/or an offer price of an option on an underlying asset comprising:

a server receiving first input data corresponding to a plurality of parameters defining said option and providing an output corresponding to a bid price and/or an offer price of said option, the server further receiving second input data corresponding to a plurality of current market conditions relating to said underlying asset; and

a processor, associated with said server, which computes, based on said first and second input data, a corrected theoretical value (CTV) of said option and a bid/offer spread of said option, and which further computes, based on said CTV and bid/offer spread, the bid price and/or the offer price of said option.

22. A system according to claim 21 wherein said first data comprises an indication of at least one parameters selected from the group including a type of said option, an expiration date of said option, and a trigger for said option.

23. A system according to claim 21 or claim 22 wherein said second data comprises an indication of at least one market condition selected from the group including a spot value, an interest rate, a volatility, an at the money volatility, a 25 delta risk reversal, a 25 delta butterfly, and a 25 delta strangle.

24. A system according to any of claims 21-23 wherein, in computing said CTV, said processor computes a theoretical value (TV) of said option and corrects said TV, based on at least part of said first and second data, to yield said CTV.

25. A system according to claim 23 or claim 24 wherein, in correcting said TV, said processor computes a plurality of TV corrections based on at least part of said first and second input data and applies said plurality of TV corrections to said TV.

26. A system according to claim 25 wherein at least one of said corrections is a function of at least one factor related to a risk associated with said option.

27. A system according to claim 26 wherein said plurality of TV corrections comprise at least one correction selected from the group including a convexity correction, a risk reversal correction, a shift correction, a gearing correction, a Vega correction, and an intrinsic value correction.

28. A system according to any of claims 25-27 wherein, in applying said TV corrections to said TV, said processor computes a TV correction weight for each of said TV corrections, multiplies each of said TV corrections by its TV correction weight to yield a corresponding weighted TV correction, and adds said weighted TV corrections to said TV.

29. A system according to claim 28 wherein at least one of said TV correction weights is time dependent.

30. A system according to any of claims 21-29 wherein, in computing said bid/offer spread, said processor computes a base value for the bid/offer spread and corrects said base value, based on at least part of said first and second data, to yield said bid/offer spread.

31. A system according to claim 30 wherein, in correcting said base value, said processor computes a plurality of bid/offer spread corrections and applies said plurality of bid/offer spread corrections to said base value.

32. A system according to claim 31 wherein at least one of said bid/offer spread corrections is a function of at least one factor related to a risk associated with said option.

33. A system according to claim 32 wherein said plurality of bid/offer spread corrections comprise at least one correction selected from the group including a convexity correction, a risk reversal correction, a shift correction, a gearing correction, a Vega correction, and an intrinsic value correction.

34. A system according to any of claims 31-33 wherein, in applying said bid/offer spread corrections to said base value, said processor computes a bid/offer spread correction weight for each of said bid/offer spread corrections, multiplies each of said bid/offer spread corrections by its bid/offer spread correction weight to yield a corresponding weighted bid/offer spread correction, and adds said weighted bid/offer spread corrections to said base value.

35. A system according to claim 34 wherein at least one of said bid/offer spread correction weights is time dependent.

36. A system according to any of claims 21-35 wherein said underlying asset comprises a financial asset.

37. A system according to claim 36 wherein said option is a foreign exchange (FX) option.

38. A system according to claim 37 wherein said option FX option is a Vanilla option.

39. A system according to any of claims 21-36 wherein said option comprises an option-like financial derivative.

40. A system according to any of claims 21-37 or 39 wherein said option is an exotic option.

41. A method for providing a bid price and/or an offer price of an option on an underlying asset, comprising the steps of:

receiving first input data corresponding to a plurality of parameters defining said option;

receiving second input data corresponding to a plurality of current market conditions relating to said underlying asset;

computing a plurality of building blocks based on said first and second input data, at least one of said building blocks being a function of a factor related to a risk associated with said option;

computing a bid price and/or an offer price of said option as a function of at least some of said building blocks; and

providing an output corresponding to the bid price and/or the offer price of said option.

42. A method according to claim 41 wherein the step of computing said bid price and/or said offer price comprises the steps of:

computing a corrected theoretical value of said option as a first function of at least some of said building blocks;

computing a bid/offer spread of said option as a second function of at least some of said building blocks; and

computing said bid price and/or said offer price of said option based on said corrected TV and said bid/offer spread.

43. A method according to claim 41 further comprising the steps of:

computing a plurality of corrections based on at least one or said plurality of building blocks;

computing a plurality of weights corresponding to each of said plurality of corrections;

combining said plurality of corrections and said plurality of weights yielding a plurality of weighted corrections; and

computing said bid price and/or offer price as a function of said plurality of weighted corrections.

44. A method according to claim 43 wherein at least one of said plurality of weights is time dependent.

45. A method according to any of claims 41-44 wherein said plurality of building blocks comprises at least one building block selected from the group including convexity, risk reversal, shift, gearing, Vega profile, and intrinsic value.

46. A method according to any of claims 41-45 wherein said underlying asset comprises a financial asset.

47. A system for providing a bid price and/or an offer price of an option on an underlying asset comprising:

a server receiving first input data corresponding to a plurality of parameters defining said option and providing an output corresponding to a bid price and/or an offer price of said option, the server further receiving second input data corresponding to a plurality of current market conditions relating to said underlying asset; and

a processor, associated with said server, which computes a plurality of building blocks based on said first and second input data, at least one of said building blocks being a function of at least one factor related to a risk associated with said option, and which further computes the bid price and/or the offer price of said option as a function of at least some of said building blocks.

48. A system according to claim 47 wherein, in computing the bid price and/or offer price of said option, said processor computes a corrected theoretical value of said option as a first function of at least some of said building blocks, a bid/offer spread of said option as a second function of at least some of said building blocks, and wherein the processor computes the bid price and/or offer price of said option based on said corrected TV and said bid/offer spread.

49. A system according to claim 47 wherein said processor further computes a plurality of corrections based on at least one or said plurality of building blocks;

a plurality of weights corresponding to each of said plurality of corrections;

a plurality of weighted corrections based on said plurality of corrections and said plurality of weights; and

said bid price and/or offer price as a function of said plurality of weighted corrections.

50. A system according to claim 49 wherein at least one of said plurality of weights is time dependent.

51. A system according to any of claims 47-50 wherein said plurality of building blocks comprises at least one building block selected from the group including convexity, risk reversal, shift, gearing, Vega profile, and intrinsic value.

52. A system according to any of claims 47-51 wherein said underlying asset comprises a financial asset.