Method for creating and pricing options
View Patent ↗A preferred embodiment of the subject invention is directed to creation and pricing of an option related to a target zone in a time-price plot. If the price curve against time enters this zone (in a preferred embodiment, a “box”), a fixed amount of money is paid to the owner of the option; if the curve misses the box, there is no payout to the option owner, who also forfeits the premium paid for the option. Software is described that enables an option buyer to easily create and set the parameters of such an option, that computes a premium for the option, and that manages payout and other functions related to the option. The above-described embodiment is a buy-to-hit option. Other embodiments are directed to sell-to-hit, buy-to-miss, and sell-to-miss options.
1. A method of pricing box options for an asset that has a value that varies over time, comprising the steps of:
(a) receiving data representing values of the asset over time;
(b) receiving data representing parameters of a box option on the asset;
(c) computing a probability of the value of the asset hitting the box from the front;
(d) computing the probability of the value of the asset hitting the box from the top;
(e) computing the probability of the value of the asset hitting the box from the bottom;
(f) computing the probability of the value of the asset hitting the box anywhere; and
(g) computing a price for the option by multiplying a modified probability p! times an amount of money to be paid for hitting the box, then adding a transaction fee, wherein said modified probability p! is calculated according to the formula:
p
′
=
(
1
+
c
)
p
1
+
cp
where c is a non-negative safety parameter and p is the probability of the value of the asset hitting the box anywhere.
2. The method of claim 1 , wherein the probabilities of the value of the asset hitting the box from the front, top, and bottom are computed using a plurality of volatility scenarios.
3. The method of claim 2 , wherein the probability of the value of the asset hitting the box from anywhere is computed according to the formula:
p
=
∑
i
=
1
m
w
i
′
p
i
where p i is the probability of hitting the box anywhere for an ith volatility scenario, and w! i is an normalized weight of Hermite integration.
4. The method of claim 1 , wherein the transaction fee is zero.
5. The method of claim 1 wherein the asset is currency.