Patent ID: 7761360

Claim:
A processor-enabled method for simulating changes in volatility for a price of a particular option on an underlying financial instrument comprising: providing by a processor a surface model having at least one surface parameter; providing by the processor a set of historical volatilities for a plurality of options on the underlying financial instrument; analyzing by the processor the set of historical volatilities to determine an initial surface parameter value for each surface parameter which, when used in the surface model, defines a surface approximating the set of historical volatilities; generating by the processor an initial volatility surface based on the provided surface model and the determined initial surface parameter value; determining by the processor a beta evolution function; determining by the processor at least one evolved surface parameter value on the processor in accordance with the beta evolution function; wherein the beta evolution function is a function of at least one beta evolution parameter, a surface parameter, and a noise component ε; wherein determining the at least one evolved surface parameter value by the processor comprises: determining by the processor at least one beta evolution parameter value based at least in part on historical analysis, selecting by the processor a value of ε from a set of predetermined noise values associated with each surface parameter, and calculating by the processor the at least one evolved surface parameter value using the beta evolution function with the selected value of ε; generating by the processor at least one volatility surface based on the provided surface model and the determined at least one evolved surface parameter value; extracting by the processor a volatility for the particular option from the generated at least one volatility surface; generating by the processor calibration data representing offsets between at least some of the volatilities in the provided set of historical volatilities and at least some of the volatilities on the generated initial volatility surface; adjusting by the processor the extracted volatility in accordance with the calibration data; and applying by the processor the adjusted extracted volatility to an option pricing model to provide a price for the particular option.