Patent ID: 8255310

Claim:
A computer processor-implemented method for pricing a sector index option, the method comprising: retrieving by a computer processor a volatility surface model from memory based at least in part on historical data for options of a given security, the volatility surface model defining a volatility surface using a plurality of surface parameters β o . . . β n , where n is an integer greater than or equal to zero, wherein the surface model has a form: σ(Δ,T)=F(β o , . . . ,β n ,Δ,T) where: σ is a measure of the volatility for an option with a given Δ and T, F is a function of Δ, T and the surface parameters β o . . . β n , Δ is a ratio of change in option price to change in underlying instrument price, and T is an option term remaining; providing by the computer processor values for surface parameters β o,k . . . β n,k 1<k≦N that define, for each particular component instrument k of the sector index option, a respective volatility surface via the surface model for options on that component instrument; determining by the computer processor values for surface parameters β B,o . . . β B,n defining a volatility surface for the sector index option using the surface parameters β o,k . . . β n,k associated with each component instrument; extracting by the computer processor a volatility value from the volatility surface for the sector index option defined by surface parameters β B,o . . . β B,n ; and determining by the computer processor a price of the sector index option based on the extracted volatility value and at least one option pricing model stored in memory.