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

• US 8,326,715 B2
• Filed: 05/04/2005
• Issued: 12/04/2012
• Est. Priority Date: 05/04/2005
• Status: Active Grant

• Current Assignee: Cboe Exchange, Inc. (Cboe Global Markets, Inc.)
• Original Assignee: Chicago Board Options Exchange Incorporated (Cboe Global Markets, Inc.), CTC Trading Group, LLC
• Inventors: Feuser, Daniel, Chern, Eric, Kepes, Paul, Hall, Andrew, Biscamp, Lewis, Hiatt, John C. Jr.
• Primary Examiner(s): MARCUS, LELAND R
• Application Number:
  US11/122,748
• Publication Number:
  US 20060253370A1
• Time in Patent Office: 2,771 Days
• Field of Search: None
• US Class Current: 705/35
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange

Abstract

Methods and systems for creating and trading derivative contracts based on a statistical property reflecting a variance of an underlying asset are disclosed. Typically, an underlying asset is chosen to be a base of a variance derivative and a processor calculates a value of the statistical property reflecting an average volatility of price returns of the underlying asset over a predefined period. A trading facility display device coupled to a trading platform then displays the variance derivative based on the value of the statistical property reflecting the volatility of the underlying asset and the trading facility transmits variance derivative quotes from liquidity providers over at least one dissemination network.

Claims

1. A computer-implemented method of calculating and disseminating a value of an underlying asset associated with at least one variance derivative, the method comprising:

calculating, with a processor, a value for a statistical property reflecting the variance of the underlying asset on a processor, the value for the statistical property having a value which reflects an average volatility of price returns of the underlying asset over a predefined time period, wherein calculating the value for the statistical property reflecting the variance of the underlying asset comprises calculating an average of a summation of each squared daily return of the underlying asset;

displaying, with the processor, at least one variance derivative based on the statistical property reflecting variance on a trading facility display device coupled to a trading platform;

transmitting, with the processor, at least one variance derivative quote of a liquidity provider from the trading facility to at least one market participant; and

settling, with the processor, the at least one variance derivative based on a difference between a first cumulative realized variance and a strike price set at a fixed second cumulative realized variance, wherein the strike price is set at the fixed second cumulative realized variance when the variance derivative is created;

wherein calculating the value for the statistical property reflecting the variance of the underlying asset comprises;

calculating the value of the statistical property according to the formula;

2. The method of claim 1 wherein calculating the value of the statistical property reflecting the variance of the underlying asset comprises:

removing the squared deviation of a daily return of the underlying asset that corresponds to a market disruption event.

3. The method of claim 1, further comprising:

executing trades for the variance derivative by matching bids and offers to buy and sell positions in variance derivatives.

4. The method of claim 1, wherein the underlying asset is selected from the group consisting of:

commodity or structured products traded on a trading facility or over-the-counter market;

equity indexes or securities;

fixed income indexes or securities;

foreign currency exchange rates;

interest rates; and

commodity indexes.

5. The method of claim 1, wherein at least one of the at least one variance derivative is a variance option contract.

6. The method of claim 1, wherein at least one of the at least one variance derivative is a variance futures contract.

7. The method of claim 6, further comprising:

calculating the cumulative realized variance of the variance futures contract on a processor, wherein the cumulative realized variance is an average of the value of the statistical property during a variance calculation period of the variance futures contract up to a current date;

displaying the cumulative realized variance on the trading facility display device; and

transmitting the cumulative realized variance from the trading facility to at least one market participant.

8. The method of claim 7, further comprising:

calculating an implied realized variance of the variance futures contract according to the formula;

9. The method of claim 6, wherein the variance futures contract has a set expiration date.

10. The method of claim 1, wherein the trading platform is an open outcry platform.

11. The method of claim 1, wherein the trading platform is an electronic platform.

12. The method of claim 1, wherein the trading platform is a hybrid of an open outcry platform and an electronic platform.

13. The method of claim 1, further comprising:

transmitting the at least one variance derivative quote from the trading facility over at least one dissemination network.

14. The method of claim 13, wherein the dissemination network is the Options Price Reporting Authority.

15. The method of claim 1, wherein the trading facility is an exchange.

16. The method of claim 1, wherein the liquidity provider is selected from the group consisting of:

Designated Primary Market Makers (“

DPM”

), market makers, locals, specialists, trading privilege holders, members, and a registered trader.

17. The method of claim 1, wherein the market participant is selected from the group consisting of:

a liquidity provider, a brokerage firm, and a normal investor.

18. The method of claim 1, wherein a variance derivative of the at least one variance derivative is a chooser variance derivative where a buyer of the chooser variance derivative may choose after purchase of the chooser variance derivative whether the chooser variance derivative is a call option or a put option.

19. A computer-implemented method of calculating and disseminating a value of an underlying asset associated with derivatives, the method comprising:

choosing, with a processor, at least one underlying asset to be a base of a variance derivative;

calculating, with the processor, a value of a statistical property reflecting the variance of the at least one underlying asset, the value for the statistical property having a value which reflects an average volatility of price returns of the at least one underlying asset over a variance calculation period;

removing, with the processor, each squared deviation of a daily return of the at least one underlying asset that corresponds to a market disruption event;

displaying, with the processor, variance derivatives based on the value of the statistical property on a trading facility display device coupled to a trading platform; and

settling, with the processor, the variance derivatives based on a difference between a first cumulative realized variance and a strike price set at a fixed second cumulative realized variance, wherein the strike price is set at the fixed second cumulative realized variance when the variance derivative is created;

wherein calculating the value of the statistical property reflecting the variance of the at least one underlying asset comprises;

calculating the value of the statistical property according to the formula;

20. The method of claim 19, further comprising:

transmitting at least one variance derivative quote over a dissemination network to at least one market participant.

21. The method of claim 19, wherein the value of the statistical property reflecting the variance of the at least one underlying asset is calculated in real time.

22. The method of claim 19, wherein the at least one underlying asset is selected from the group consisting of:

commodity or structured products traded on a trading facility or over-the-counter market;

equity indexes or securities;

fixed income indexes or securities;

foreign currency exchange rates;

interest rates; and

commodity indexes.

23. The method of claim 19, wherein the trading platform is an open outcry platform.

24. The method of claim 19, wherein the trading platform is an electronic platform.

25. The method of claim 19, wherein the trading platform is a hybrid of an open outcry platform and an electronic platform.

26. The method of claim 19 wherein one of the variance derivatives is a variance futures contract.

27. The method of claim 19 wherein one of the variance derivatives is a variance option contract.

28. The method of claim 19, wherein the market participant is a market participant selected from the group consisting of:

a liquidity provider, a brokerage firm, and a normal investor.

29. The method of claim 19, wherein the trading facility is an exchange.

30. The system of claim 19, where the variance derivatives are chooser variance derivatives where a buyer of a first chooser derivative of the chooser variance derivatives may choose after purchase of the first chooser derivative whether the chooser variance derivative is a call option or a put option.

31. A system for calculating and disseminating a value of an underlying asset associated with a variance derivative, the system comprising:

a variance property module comprising a first processor, a first memory coupled with the first processor, and a first communications interface coupled with a communications network, the first processor, and the first memory;

a dissemination module coupled with the variance property module, the dissemination module comprising a second processor, a second memory coupled with the second processor, and a second communications interface coupled with the communications network, the second processor, and the second memory;

a first set of logic, stored in the first memory and executable by the first processor to receive current values for an underlying asset of a variance derivative through the first communications interface;

calculate, based on a calculated value of a statistical property reflecting a variance of the underlying asset, a realized variance, cumulative realized variance, and implied realized variance for the underlying asset; and

pass values for the calculated realized variance, cumulative realized variance, and implied realized variance to the dissemination module; and

a second set of logic, stored in the second memory and executable by the second processor to receive the calculated realized variance, cumulative realized variance, and implied realized variance values for the underlying asset from the variance property module; and

disseminate the calculated values through the second communications interface to at least one market participant;

wherein the variance derivative is settled based on a difference between the cumulative realized variance and a strike price set at a fixed second cumulative realized variance, wherein the strike price is set at the fixed second cumulative realized variance when the variance derivative is created; and

wherein the calculated value of the statistical property reflecting the variance of the underlying asset is calculated according to the formula;

32. The system of claim 31, further comprising:

a trading module coupled with the dissemination module, the trading module comprising a third processor, a third memory coupled with the third processor, and a third communications interface coupled with the communications network, the third processor, and the third memory;

a third set of logic, stored in the third memory and executable by the third processor, to receive at least one buy or sell order over the communications network;

execute the buy or sell order; and

pass a result of the buy or sell order to the dissemination module; and

a fourth set of logic, stored in the second memory and executable by the second processor to receive the result of the buy or sell order from the trading module and disseminate the result of the buy or sell order through the second communications network to the at least one market participant.

33. The system of claim 31, wherein the variance derivative is a chooser variance derivative where a buyer of the chooser variance derivative may choose after purchase of the chooser variance derivative whether the chooser variance derivative is a call option or a put option.