Patent ID: 7739187

Claim:
A computer system for financial decisioning, the system generating a premium for an option, said option associated with a volatility, a volatility of volatility and a distribution type, said system comprising: a computer processor programmed to: receive a volatility distribution based on said volatility, said volatility of volatility, and said distribution type; divide the volatility distribution into a plurality of portions, each said portion corresponding to a volatility, each said portion being associated with a probability; determine an option premium for each volatility portion by employing a volatility premium calculation with rate r with forward value r , strike k, expiration time t, and annualized volatility σ according to the following formula: BSQ ⁡ ( r _ , c , σ , t ) = r _ ⁢ 1 q · Φ ⁡ ( d 1 ) + r _ ⁡ ( 1 - 1 q - k ~ ) · Φ ⁡ ( d 2 ) Where Φ is the normal cumulative inverse function and k ~ = ⁢ k / r _ x ~ = ⁢ - 1 q ⁢ ln ⁡ [ ( k ~ - 1 ) ⁢ q + 1 ] / ( σ ⁢ t ) d 1 = ⁢ x ~ + 1 2 ⁢ q ⁢ ⁢ σ ⁢ t d 2 = ⁢ x ~ - 1 2 ⁢ q ⁢ ⁢ σ ⁢ t weigh each option premium by the probability associated with said volatility portion; and sum all weighed premiums associated with said volatility portions to provide a premium for the option.