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Method and system for simulating implied volatility surfaces for use in option pricing simulations

  • US 7,149,715 B2
  • Filed: 06/29/2001
  • Issued: 12/12/2006
  • Est. Priority Date: 06/29/2001
  • Status: Active Grant
First Claim
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1. A method for simulating changes in volatility for a price of a particular option on an underlying financial instrument comprising the steps of:

  • (a) providing a surface model having at least one surface parameter;

    (b) providing a set of volatilities for a plurality of options on the underlying financial instrument;

    (c) analyzing the set of volatilities to determine a surface parameter value;

    (d) determining a surface parameter value in accordance with a beta evolution function; and

    (e) defining a surface approximating the set of volatilities using the surface model and the surface parameter value;

    (f) extracting a volatility for the particular option from a volatility surface defined by surface model using the next value of the at least one surface parameter value;

    wherein the extracted volatility is used in an option pricing model to provide a price of the particular option.

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