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

Abstract

A system and method for creating a limited risk derivative based on a realized variance of an underlying equity is disclosed. In one implementation, a limited risk derivative product includes a capped value for a statistical property reflecting a variance of the underlying equity is calculated based on a pari-mutuel action. The capped value comprises a dynamic value and a cap. The dynamic value reflects an average volatility of prices returns of the underlying equity over a predefined period of time and the cap reflects a maximum value of the dynamic value. The limited risk derivative product additionally includes an average of a summation of each squared daily return of the underlying equity included in the value for the statistical property reflecting the variance of the underlying equity.

1 . A system for creating a limited risk derivative product based on a realized variance of an underlying equity, comprising:
 a variance property module comprising a processor and a memory coupled with the processor, the processor configured to execute logic stored in the memory to create a limited risk derivative product based on a realized variance of an underlying equity, the limited risk derivative product comprising a capped value for a statistical property reflecting the variance of the underlying equity and an average of a summation of each squared daily return of the underlying equity included in the capped value for the statistical property reflecting the variance of the underlying equity;   wherein the capped value for the statistical property reflecting the variance of underlying equity comprises a value and a cap, the value reflecting an average volatility of price returns of the underlying equity over a predefined time period and the cap reflecting a maximum value of the value reflecting the average volatility of price returns of the underlying equity over the predefined time period; and   wherein the limited risk derivative product is settled based on the capped value and a difference between a cumulative realized variance and a strike price set at a fixed second cumulative realized variance, wherein the strike prices is set at the fixed second cumulative realized variance when the limited risk derivative product is created.   
     
     
         2 . The system of  claim 1 , wherein a squared deviation of a daily return of the underlying equity that corresponds to a market disruption event is removed from the average volatility of price returns of the underlying equity over the predefined time period. 
     
     
         3 . The system of  claim 1 , wherein the underlying equity 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; and foreign currency exchange rates; interest rates; commodity indexes. 
     
     
         4 . The system of  claim 1 , wherein the capped value is calculated from a parimutuel auction. 
     
     
         5 . The system of  claim 1 , wherein the limited risk derivative product is a variance futures product. 
     
     
         6 . The system of  claim 1 , wherein the limited risk derivative product is a variance options product. 
     
     
         7 . The system of  claim 6 , wherein the variance options product is a limited risk option contract. 
     
     
         8 . The system of  claim 7 , wherein the limited risk option contract comprises a contract payout that is a capped variable amount. 
     
     
         9 . The system of  claim 7 , wherein the limited risk option contract comprises a payout that is a constant amount when the value of the underlying asset is in a specified strike range at expiration and zero when the value of the underlying asset is outside the specified strike range. 
     
     
         10 . The system of  claim 7 , wherein the limited risk option contract comprises a combination of a long call option comprising a contract payout that is a capped variable amount with a short put option comprising a contract payout that is a capped variable amount, both the long call option and the short put option having the same strike prices and option premium prices. 
     
     
         11 . A computer-implemented method of calculating and disseminating a value of an underlying asset associated with at least one limited risk variance derivative, the method comprising:
 calculating, with a processor, from a plurality of pari-mutuel auctions, a capped value for a statistical property reflecting the variance of the underlying equity, the capped value comprising a value and a cap, the value reflecting an average volatility of price returns of the underlying equity over a predefined time period and the cap reflecting a maximum value of the value reflecting the average volatility of price returns of the underlying equity over the predefined time period;   calculating, with the processor, an average of a summation of each squared daily return of the underlying equity included in the value for the statistical property reflecting the variance of the underlying equity;   displaying, with the processor, at least one limited risk variance derivative based on the statistical property reflecting variance of the underlying equity on a trading facility display device coupled to a trading platform;   transmitting, with the processor, at least one limited risk 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 limited risk variance derivative based on the capped value and 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 at least one limited risk variance derivative is created.   
     
     
         12 . A computer-implemented method of creating a limited risk derivative product, the method comprising:
 with a processor in a trading platform:
 calculating a realized variance of an underlying equity; 
 creating the limited risk derivative associated with the underlying equity based on the realized variance of the underlying equity, the limited risk derivative product comprising a capped value for a statistical property reflecting the variance of the underlying equity and an average of a summation of each squared daily of the underlying equity included in the capped value for the statistical property reflecting the variance of the underlying equity; and 
 displaying limited risk derivative and the statistical property reflecting the variance of the underlying equity on a trading platform display device coupled with the trading platform; 
   wherein the capped value for the statistical property reflecting the variance of underlying equity comprises a value and a cap, the value reflecting an average volatility of price returns of the underlying equity over a predefined time period and the cap reflecting a maximum value of the value reflecting the average volatility of price returns of the underlying equity over the predefined time period; and   wherein the limited risk derivative product is settled based on the capped value and 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 limited risk derivative product is created.   
     
     
         13 . 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 realized variance of an underlying equity; 
 create the limited risk derivative associated with the underlying equity based on the realized variance of the underlying equity, the limited risk derivative product comprising a capped value for a statistical property reflecting the variance of the underlying equity and an average of a summation of each squared daily of the underlying equity included in the capped value for the statistical property reflecting the variance of the underlying equity; and 
 display the limited risk derivative and the statistical property reflecting the variance of the underlying equity on a trading platform display device coupled with the trading platform; 
   wherein the capped value for the statistical property reflecting the variance of underlying equity comprises a value and a cap, the value reflecting an average volatility of price returns of the underlying equity over a predefined time period and the cap reflecting a maximum value of the value reflecting the average volatility of price returns of the underlying equity over the predefined time period; and   wherein the limited risk derivative product is settled based on the capped value and 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 limited risk derivative product is created.