Volatility Arbitrage Benchmark Index Calculation Method
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Solution Overview
Problem
Current derivative investment instruments lack the capability to capture changes in the performance of total return volatility indices, limiting their flexibility and applicability in financial trading systems.
Innovation Solution
The development of a volatility arbitrage benchmark index calculation method using daily closing prices of derivative investment instruments, employing formulas such as Indext=Indext-1×[1+(pt-pt-1)] or Indext=Indexi×[1+(pt-pi)], to create a dynamic value reflecting the performance of underlying assets over time, facilitating the creation and trading of volatility-based derivative instruments.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Adaptability or versatility
If traditional derivative investment instruments are used, then the system maintains simplicity and ease of operation, but the system cannot capture changes in the performance of total return volatility indices
Solution Approach 1:
The patent segments the derivative instrument into distinct components: the underlying volatility index, the option contract structure (strike price, expiration date), and the performance capture mechanism. This segmentation allows each component to be independently defined and managed, enabling the instrument to capture volatility index performance while maintaining operational clarity through modular structure
Solution Approach 2:
The patent introduces an intermediary volatility index as a benchmark that mediates between the underlying assets and the derivative instrument performance. This intermediary index serves as a standardized reference point that enables the derivative instrument to capture and measure volatility index performance changes without requiring direct complex modeling of total return volatility
2Productivity
If volatility-based derivative instruments are created using the new methodology, then the system enhances market participation and visibility with standardized measures, but the system requires complex calculations using daily closing prices and multiple formulas
Solution Approach 1:
The patent employs periodic action by calculating the volatility index using daily closing prices at regular intervals. The index is updated periodically (daily) using a standardized formula that incorporates option price changes, creating a rhythmic, predictable calculation cycle that enhances market participation while managing computational complexity through routine processing
Solution Approach 2:
The patent utilizes parameter changes by incorporating multiple variables into the index calculation formula, including daily closing prices (pt, pt-1), index values (Indext, Indext-1), and option prices (pi). These parameter changes allow the index to dynamically reflect market conditions and volatility changes, driving market participation through responsive, data-driven measurements
3Reliability
If the index is adjusted frequently to reflect market changes, then the index maintains accuracy and reliability, but the index requires continuous monitoring and periodic re-adjustments of component weights
Solution Approach 1:
The patent implements periodic action by resetting the weights of index components to equal values at regular intervals (e.g., every quarter). This periodic re-adjustment maintains the reliability and accuracy of the index in reflecting market performance while minimizing the time and resources required compared to continuous monitoring and adjustment mechanisms
Data Source
AI summary
A system and method for creating a volatility arbitrage bench mark index is disclosed. The method includes obtaining closing prices of an underlying instrument, such as a derivative investment instrument, and calculating a value representing a volatility arbitrage benchmark. The value may be displayed at a trading facility and volatility arbitrage benchmark quotes may be transmitted by the trading facility to a market participant.