System for settling model options

Abstract

A computer implemented system for calculating a settlement price for a Model Option contract, a new type of option that contains a settlement right at a price that is determined by a specified valuation methodology comprising an option pricing model and input values necessary to run the option pricing model.

1 - 3 . (canceled) 
   
   
       4 . A computer-implemented information system operative for calculating a theoretical value for an option contract that contains a right to settle said option contract with an option seller at a price that is determined by a specified valuation methodology that contains a description of an option pricing model and input values necessary to run said option pricing model, comprising a computer and a data storage device storing software in a computer readable medium that runs on said computer and calculates said theoretical value for said option contract by performing the steps of:
 a. constructing a lattice of possible underlying asset prices to the expiration of said option contract;   b. calculating an intrinsic value at each node of said lattice;   c. calculating a settlement price at each said node by implementing said option contract's specified valuation methodology;   d. selecting said intrinsic value at each ultimate node as an ultimate nodal value;   e. backwardly inducing from each said ultimate nodal value a provisional penultimate nodal value at each penultimate node;   f. selecting the greater of said provisional penultimate nodal value, said intrinsic value, or said settlement price at each said penultimate node as a nodal value for each said penultimate node,   g. backwardly inducing a provisional nodal value for each previous node in said lattice from each succeeding node's nodal value and selecting the greater of said provisional nodal value, said intrinsic value, or said settlement price at each said previous node as said previous node's nodal value;   h. continuing this process until a nodal value has been determined for each node in said lattice; and   i. selecting said lattice's first nodal value as said theoretical value of said option contract.   
   
   
       5 . The computer-implemented information system of claim  1  wherein said possible underlying asset prices are developed using a binomial lattice. 
   
   
       6 . The computer-implemented information system of claim  1  wherein said possible underlying asset prices are developed using a trinomial lattice.