Method and system for simulating implied volatility surfaces for use in option pricing simulations
First Claim
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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Accused Products
Abstract
A method and system for simulating changes in volatility for a price of a particular option on an underlying financial instrument is disclosed. A volatility surface model having at least one surface parameter is provided along with a set of volatilities for a plurality of options on the underlying financial instrument. The set of volatilities is analyzed to determine an initial value for each surface parameter which, when used in the surface model, defines a surface approximating the set of volatilities. The values of the surface parameters are then evolved using an appropriate evolution function. A volatility value for a particular option is extracted from the volatility surface defined by the evolved surface parameter values. The extracted volatility value can then be used in an option pricing model to provide a price of the particular option.
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Citations
24 Claims
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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:
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(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. - View Dependent Claims (2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12)
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13. A system for simulating changes in volatility for a price of a particular option on an underlying financial instrument comprising:
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a computer having a processor and at least one data store; the data store containing therein at least; a surface model having at least one surface parameter; and a set of volatilities for a plurality of options on the underlying financial instrument; the processor being configured via computer software to; analyze the set of volatilities to determine a surface parameter value; determine a surface parameter value in accordance with a beta evolution function; define a surface approximating the set of volatilities using the surface model and the surface parameter value, and extract a volatility for the particular from a volatility surface defined by surface model using 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. - View Dependent Claims (14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24)
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Specification