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Method and system for creating and trading derivative investment products based on a statistical property reflecting the variance of an underlying asset

  • US 20070106583A1
  • Filed: 10/10/2006
  • Published: 05/10/2007
  • Est. Priority Date: 05/04/2005
  • Status: Active Grant
First Claim
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1. A limited risk derivative product based on a realized variance of an underlying equity, comprising:

  • a capped value for a statistical property reflecting the variance of the underlying equity, the capped value for the statistical property comprising a dynamic value and a cap, the dynamic value reflecting an average volatility of price returns of the underlying equity over a predefined time period and the cap reflecting a maximum value of the dynamic value; and

    an average of a summation of each squared daily return of the underlying equity included in the value for the statistical property reflecting the variance of the underlying equity;

    wherein the value of the statistical property is calculated according to the formula;

    Realized





    Variance
    =A





    F×

    (

    i=1Na-1


    Ri2/(Ne-1)
    )
    wherein;



    Ri
    =ln





    Pi+1Pi
    ,
    Pi is an initial value of the underlying equity used to calculate a daily return, Pi+1 is a final value of the underlying equity used to calculate the daily return, Ne is a number of expected underlying equity values needed to calculate daily returns during a variance calculation period, Na is an actual number of underlying equity values used to calculate daily returns during the variance calculation period; and

    AF is an annualization factor.

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