Reduction of financial instrument volatility

• US 20050131796A1
• Filed: 01/26/2005
• Published: 06/16/2005
• Est. Priority Date: 11/28/2000
• Status: Abandoned Application

• Current Assignee: Goldman Sachs & Company (Goldman Sachs Group Incorporated)
• Original Assignee: Goldman Sachs & Company (Goldman Sachs Group Incorporated)
• Inventors: Evans, Mark, Bridges, Tim, Frankel, Oliver
• Application Number:
  US11/043,618
• Publication Number:
  US 20050131796A1
• Time in Patent Office: Days
• US Class Current: 705/36.R
• CPC Class Codes: G06Q 40/02 Banking, e.g. interest calculation or account maintenance credit or loans G06Q40/03
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis
• CPC Class Codes: G06Q 40/12 Accounting

Abstract

An earnings volatility reduction procedure includes determining a first sensitivity value of a portfolio to underlying market conditions, trading in an immunizing instrument having a second sensitivity value substantially equal in magnitude and opposite in value of the first sensitivity value, and trading in a qualifying instrument having a third sensitivity value substantially equal to the first sensitivity value. A derivative portfolio (in particular, one that includes a financial instrument for which changes in value are characterized as earnings pursuant to FAS 133) is structured by determining a sensitivity of the derivative portfolio with respect to financial conditions in a trading market, executing an immunizing purchase of a second trading instrument in an amount equal to the magnitude of the current sensitivity and opposite in value, and executing a qualifying sale of a third trading instrument in an amount equal to amount of the current sensitivity.

Claims

1. A method of reducing earnings volatility in accounting for a derivative portfolio, the method comprising:

determining a first sensitivity value of a portfolio to underlying market conditions;

trading in an immunizing instrument having a second sensitivity value substantially equal in magnitude and opposite in value of the first sensitivity value; and

trading in a qualifying instrument having a third sensitivity value substantially equal to the first sensitivity value.

2. The method of claim 1 wherein the underlying market conditions comprise price and rate conditions.

3. The method of claim 1 wherein where the first, second and the third sensitivity values comprise notational amount values.

4. The method of claim 1 wherein where the first, second and the third sensitivity values each comprise composite values and each of said sensitivity values is based on a different plurality of financial instruments.

5. The method of claim 1 wherein the portfolio comprising a derivative portfolio comprising an instrument for which changes in value are accounted for as quarterly earnings pursuant to Financial Standards Accounting Board Statement Number 133.

6. The method of claim 1 wherein the sensitivity is expressed as a schedule of forward notional amounts.

7. The method of claim 1 wherein trading in the immunizing instrument comprises transacting an at-the-market purchase establishing a long position in a first trading instrument.

8. The method of claim 7 wherein trading in the qualifying instrument comprises transacting an at-the-market fixed price sale establishing a short position in a second trading instrument.

9. The method of claim 8 wherein the first trading instrument comprises a plurality of different constituent financial instruments.

10. The method of claim 1 wherein the portfolio, the immunizing instrument, and the qualifying instrument are related to a same commodity.

11. A method of structuring a derivative portfolio comprising:

determining a sensitivity of the derivative portfolio with respect to financial conditions in a trading market, the derivative portfolio comprising a first financial instrument for which change in value are characterized as earnings pursuant to Financial Standards Accounting Board Statement Number 133 (FAS

     133) accounting;

executing an immunizing purchase of a second trading instrument in an amount equal to the magnitude of the current sensitivity and opposite in value; and

executing a qualifying sale of a third trading instrument in an amount equal to amount of the current sensitivity.

12. The method of claim 11 wherein the amount equal to the current sensitivity comprises a quarterly forward amount.

13. The method of claim 11 wherein the first financial instrument, the second trading instrument, and the third trading instrument are each related to a same commodity.

14. The method of claim 11 wherein the purchase of the immunizing purchase comprises an at-the-market long swap.

15. The method of claim 11 wherein determining a sensitivity comprises determining a delta measurement, said delta measurement comprising a measure of a sensitivity of a change in a price of an option to changes in price of an underlying.

16. (canceled)

17. (canceled)

18. A computer-implemented method of reducing earnings volatility in accounting for a derivative portfolio, the method comprising:

at a computer system, executing software instructions to calculate a first sensitivity value of a portfolio to underlying market conditions;

at a computer system, processing data to determine an immunizing instrument having a second sensitivity value substantially equal in magnitude and opposite in value of the first sensitivity value;

at a computer system, processing data to determine a qualifying instrument having a third sensitivity value substantially equal to the first sensitivity value;

at a computerized trading system, processing software instructions to execute a trade in the immunizing instrument; and

at a computerized trading system, processing software instructions to execute a trade in the qualifying instrument.

19. The method of claim 18 wherein the underlying market conditions comprise price and rate conditions.

20. The method of claim 18 wherein where the first, second and the third sensitivity values comprise notational amount values.

21. The method of claim 18 wherein where the first, second and the third sensitivity values each comprise composite values and each of said sensitivity values is based on a different plurality of financial instruments.

22. The method of claim 18 wherein the portfolio comprising a derivative portfolio comprising an instrument for which changes in value are accounted for as quarterly earnings pursuant to Financial Standards Accounting Board Statement Number 133.

23. The method of claim 18 wherein the sensitivity is expressed as a schedule of forward notional amounts.

24. The method of claim 18 wherein executing a trade in the immunizing instrument comprises transacting an at-the-market purchase establishing a long position in a first trading instrument.

25. The method of claim 24 wherein executing a trade in the qualifying instrument comprises transacting an at-the-market fixed price sale establishing a short position in a second trading instrument.

26. The method of claim 25 wherein the first trading instrument comprises a plurality of different constituent financial instruments.

27. The method of claim 18 wherein the portfolio, the immunizing instrument, and the qualifying instrument are related to a same commodity.

28. A computer-implemented method of structuring a derivative portfolio comprising:

at a computer system, processing portfolio data to determine a sensitivity of the derivative portfolio with respect to financial conditions in a trading market, the derivative portfolio comprising a first financial instrument for which change in value are characterized as earnings pursuant to Financial Standards Accounting Board Statement Number 133 (FAS

     133) accounting;

processing data at a computerized trading system to execute an immunizing purchase of a second trading instrument in an amount equal to the magnitude of the current sensitivity and opposite in value; and

processing data at a computerized trading system to execute a qualifying sale of a third trading instrument in an amount equal to amount of the current sensitivity.

29. The method of claim 28 wherein the amount equal to the current sensitivity comprises a quarterly forward amount.

30. The method of claim 28 wherein the first financial instrument, the second trading instrument, and the third trading instrument are each related to a same commodity.

31. The method of claim 28 wherein the purchase of the immunizing purchase comprises an at-the-market long swap.

32. The method of claim 28 wherein determining a sensitivity comprises determining a delta measurement, said delta measurement comprising a measure of a sensitivity of a change in a price of an option to changes in price of an underlying.