Patent ID: 7958044

Claim:
A computer implemented method for financial decisioning using a computer system generating a premium for an option and making a decision based on the generated premium, the option providing a right to transact with respect to an underlying asset, the method comprising: inputting information into the computer system, the information including: an average volatility of the asset by employing historical or market data; a volatility of volatility of the asset by employing historical data; and a type of distribution for the forward rate based on historical data; providing a volatility distribution graph based on the selected distribution type, the volatility and the volatility of volatility, the volatility distribution graph having volatility as the x-axis and probability as the y-axis; dividing the volatility distribution graph into a plurality of vertical slices, each of said slices corresponding to a volatility, whereby the integration of the volatility distribution graph over the volatility range corresponding to each slice provides a probability for the corresponding volatility; determining an option premium for each vertical slice by employing a volatility premium calculation equation implemented by a computer processor of the computing system; weighing each premium from said determining of premium step by the probability associated with the corresponding volatility as determined from the volatility distribution graph; and summing all weighed premiums associated with the volatilities to provide a premium for the option, wherein the volatility premium calculation equation used to determine the stochastic volatility premium incorporates a trader-selected q to calculate the value of a call option on rate r with forward value r , strike k, expiration time t, and annualized volatility σ and is given by 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 .