dealCancellation© Option is an ORE patent pending under the patent “Embedded Cancellation Option” application numbers 62334455 and 62427826
Highlights of application
One aspect of the invention is teaching a method for looking at a volatile product and pricing insurance for canceling a deal. The novel idea is the pricing mechanism. The pricing mechanism which will be detailed enable one or more of the following options:
- Suggest a few time lead times, each with associated price. The price is monotonic, the larger the lead time the higher the price
- For a given price that someone is willing to pay for the insurance, calculate a lead time he can get for this price. Again this is monotonic the more paid, higher lead time.
- For a given lead time that the person is interested in, calculate price for the insurance
- Calculate a price of insurance which include in it the option to buy additional insurance when the time of the insurance is over. So if you bought a day with this insurance, you may be able to buy additional day when the first day is over.
The insurance may be given by the seller of the commodity, by the buyer or by a third party as a service. When given by a third party it may be with the agreement of the seller/buyer or without it, in which case when the insurance is activated the third party takes care of the buyer or seller as if it was part of the deal.
The insurance may have condition on it, for example, once the exposure passes a certain level, the insurance need to be used within a short time frame (otherwise it is gone) or it is automatically activated. This could be especially important in the case of unlimited exposure.
Our architecture for calculating the Embbeded cancellation option (“ECO”) pricing contains the following major and optional components; the optional component improves the performance:
- Real time data pre-processing
- Data validation and filtering
- Control of data window shape and width
- Mathematical variables calculations.
- Application of periodic and aperiodic patterns to calculations.
- ECO price calculation
- Validation of ECO prices.
- Feedback mechanism to adjust ECO price. The pricing can include performance estimation in real time in order to adjust pricing if needed. Performance estimation includes comparison between historical and actual realized data for the same time intervals, as well as other evaluation checks including machine learning and big data processing.
- Risk Management tools.
- The ECO prices adjacent in the time sequence should be consistent with each other (continuity requirement).
Adding ECO to the sale of a commodity
The ECO may be embedded by the seller and may be part of the selling offer. It could be that the buyer may buy an ECO of some type, it could be that the seller may want an ECO for itself with the buyer.
ECO may be done by a third party. For example, someone buys a plane ticket and wants to be able to cancel in seven days. A third party may calculate the cost of such insurance and sell it to the buyer. There is an added complication here, that the third party may be left with the commodity which is harder for it to monetize than for the regular seller but this additional complication is outside the scope of this invention.
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