Patent ID: 7328184

Claim:
A computer implemented method for the creation and trading of financial instruments based upon the volatility of an underlying comprising the following steps: (a) creating at least one volatility contract for a predetermined term, with a predetermined formula for settlement price based on a realized formula, selected from the group consisting of: S vol = P n - 1 ⁢ ∑ t = 1 n ⁢ ( R t - R _ ) 2 ( 1 ) wherein: P=approximate number of trading periods in a calendar year, and each observation point “t” is taken at the same time in each trading period; and R =mean of all R t 's; S vol = P h1 n ⁢ ∑ t = 1 n ⁢ ( ln ⁢ h t l t ) 2 ( 2 ) wherein: P h1 =total number of trading periods in a year wherein two observations points “h t ” and “l t ” are used, and “h t ” is the high price point and “l t ” the low price point for each such trading period in that year; and R t =f{h t , l t }; and S vol = P ohlc n ⁢ ∑ t = 1 n ⁢ [ 1 2 ⁢ ( ln ⁢ h t l t ) 2 - ( 2 ⁢ ln ⁡ ( 2 ) - 1 ) ⁢ ( ln ⁢ c t o t ) 2 ] ( 3 ) wherein: P ohlc =total number of trading periods, wherein four observations points “h t ”, “l t ”, “c t ” and “o t ” are used, and “h t ” is the high price point, “l t ” the low price point, “c t ” is the closing, last or daily settlement price, and “o t ” the opening price for each such trading period; R t =f{h t , l t , c t , o t }; and S vol = P n ⁢ ∑ t = 1 n ⁢ R t 2 ( 4 ) wherein: P=approximate number of trading periods in a calendar year, and each observation point “t” is taken at the same time in each trading period; and n=total number of observations within the term; and R t =return of the underlying based upon each of the observation points in time “t n ”; (b) trading the at least one volatility contract at market-determined prices from creation through the date of expiration.