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System and method for calculating intra-period volatility

  • US 20040034587A1
  • Filed: 08/19/2002
  • Published: 02/19/2004
  • Est. Priority Date: 08/19/2002
  • Status: Abandoned Application
First Claim
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1. A method of determining an intra-period volatility of a security, the method comprising the steps of:

  • (a) selecting a period;

    (b) acquiring tick data from a data source;

    (c) selecting a set of hedging intervals within the period;

    (d) selecting a hedging strategy;

    (e) selecting an amount of Gamma for a theoretical option position;

    (f) iteratively running a simulation at each hedging interval;

    (g) calculating a hedging profit or loss at each simulation;

    (h) calculating a number of options to enter into a theoretical option position having the selected amount of Gamma;

    (i) calculating a premium over parity cost of the options in the theoretical option position;

    (j) iteratively adjusting an at-the-money volatility in a selected valuation model until the pop cost for the theoretical position equals the hedging profit or loss; and

    (k) setting the intra-period volatility to the at-the-money volatility when the pop cost for the theoretical position equals the hedging profit or loss.

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