Patent ID: 8326716

Claim:
A system for creating a limited risk derivative product based on a realized variance of an underlying equity, the system 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 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 the 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 value of the statistical property reflecting the variance of the underlying equity is calculated according to the formula: Realized ⁢ ⁢ Variance = A ⁢ ⁢ F × ( ∑ i = 1 N a - 1 ⁢ R i 2 / ( N e - 1 ) ) wherein : ⁢ R i = ln ⁢ ⁢ P i + 1 P i , P i is an initial value of the underlying equity used to calculate a daily return, P i+1 is a final value of the underlying equity used to calculate the daily return, N e is a number of expected underlying equity values needed to calculate daily returns during a variance calculation period, N a is an actual number of underlying equity values used to calculate daily returns during the variance calculation period; and AF is an annualization factor; 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.