Method of Creating and Trading Derivative Investment Products Based on a Statistical Property Reflecting the Variance of an Underlying Asset

Abstract

A method of creating and trading derivative contracts based on a statistical property reflecting a variance of an underlying asset is 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.

1 . A computer-implemented method of calculating and disseminating a value associated with an underlying asset that is associated with at least one variance derivative, the method comprising: creating derivatives baced on a variance of an underlying asset, comprising:
 calculating, with a processor, a value for a statistical property reflecting the variance of the underlying asset, 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;   displaying, with the processor, on a trading display device coupled to a trading platform, at least one variance derivative based on the statistical property reflecting variance;   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, where the strike price is set at the fixed second cumulative realized variance when the variance derivative is created.   
     
     
         2 . The computer-implemented 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. 
     
     
         3 . The computer-implemented method of  claim 1 , wherein at least one of the at least one variance derivative is a variance option contract. 
     
     
         4 . The computer-implemented method of  claim 1 , wherein at least one of the at least one variance derivative is a variance futures contract. 
     
     
         5 . The computer-implemented method of  claim 4 , further comprising:
 calculating, with the processor, the cumulative realized variance of the variance futures, 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.   
     
     
         6 . The computer-implemented method of  claim 5 , further comprising:
 calculating an implied realized variance of the variance futures contract according to the formula:   
       
         
           
             
               
                 
                   Implied 
                    
                   
                       
                   
                    
                   Variance 
                 
                 = 
                 
                   
                     TP 
                     - 
                     
                       RV 
                       * 
                       
                         
                           Day 
                           Current 
                         
                         
                           Day 
                           Total 
                         
                       
                     
                   
                   
                     
                       Day 
                       Left 
                     
                     
                       Day 
                       Total 
                     
                   
                 
               
               , 
             
           
         
         wherein TP is a last trading price of the variance futures contract; RV is the cumulative realized variance; Day current  is a total number of trading days that have passed in the variance calculation period; Day total  is a total number of trading days in is the variance calculation period; and Day Left  is a number of trading days left in the variance calculation period; 
         displaying the implied realized variance on the trading facility display device; and 
         transmitting the implied realized variance from the trading facility to at least one market participant. 
       
     
     
         7 . The computer-implemented method of  claim 1 , wherein the trading platform is an open outcry platform. 
     
     
         8 . The computer-implemented method of  claim 1 , wherein the trading platform is an electronic platform. 
     
     
         9 . The computer-implemented method of  claim 1 , wherein the trading platform is a hybrid of an open outcry platform and an electronic platform. 
     
     
         10 . The computer-implemented 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. 
     
     
         11 . The computer-implemented 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. 
     
     
         12 . A system for calculating and disseminating a value associated with an underlying asset that is 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 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.   
     
     
         13 . The system of  claim 12 , 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.   
     
     
         14 . A computer-implemented method of creating a variance derivative, the method comprising:
 with a processor in a trading platform:
 calculating a value for a statistical property reflecting a variance of an underlying asset, 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; 
 creating the variance derivative associated the underlying asset based on the statistical property reflecting a variance of an underlying asset, wherein the variance derivative is settled based on a difference between a 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 
 displaying the statistical property having a value which reflects an average volatility of price returns of the underlying asset over a predefined time period on a trading platform display device coupled with the trading platform. 
   
     
     
         15 . A trading system comprising:
 a display device;   a memory device storing a set of instructions; and   a processor in communication with the display device and the memory device, the processor configured to execute the set of instructions stored in the memory and to:
 calculate a value for a statistical property reflecting a variance of an underlying asset, 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; 
 create the variance derivative associated the underlying asset based on the statistical property reflecting a variance of an underlying asset, wherein the variance derivative is settled based on a difference between a 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 
   display the statistical property having a value which reflects an average volatility of price returns of the underlying asset over a predefined time period on a trading platform display device coupled with the trading platform.