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Modeling option price dynamics

  • US 7,065,475 B1
  • Filed: 10/31/2000
  • Issued: 06/20/2006
  • Est. Priority Date: 10/31/2000
  • Status: Expired due to Term
First Claim
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1. A computer-implemented method for pricing an option comprising:

  • (a) calculating in a computer the formula;

    dF

    ( t ,

    T
    )
    F

    ( t , T )
    =

    a


    [

    i


    y ia

    B i

    ( t , T )


    g i

    ( T )
    ]


    σ

    a


    ( t )


    dz a

    ( 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;

    i represents an amount of mean reversion factors used in the model;

    t represents the current time;

    T represents the forward time;

    yia represents the move shape coefficient;

    Bi(t, T) represents the mean reversion factor;

    gi(T) represents the volatility adjustment factor;

    σ

    a(t) represents the instantaneous factor volatility; and

    dza(t) represents the random increment;

    a represents the index enumerating the random increments dza(t); and

    (b) calculating in a computer a price of an option based on the calculated results of the formula.

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