System and method for asymmetric offsets in a risk management system

• US 20060059066A1
• Filed: 01/07/2005
• Published: 03/16/2006
• Est. Priority Date: 09/10/2004
• Status: Active Grant

• Current Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Original Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Inventors: Glinberg, Dmitriy, Yoo, Tae S., Michaels, Dale A., Gogol, Edward
• Granted Patent: US 7,509,275 B2
• Time in Patent Office: Days
• US Class Current: 705/35
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• 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 40/08 Insurance

Abstract

A system and method for using asymmetrical offsets for products in a risk management analysis system are disclosed. Conventional systems assign symmetrical offsets for products, that is, if two products have an 80% correlation they each would be assigned an offset of 80% with respect to each other. However, it is desirable to allow for asymmetrical offsets. In the disclosed system and method, when two products have a correlation of 80%, one may be assigned an offset of 75% and the other may be assigned an offset of 80%. There are many reasons to vary the offset between the products. The varying offset may reflect an asymmetry in the risk in one of the products, such as being traded in an illiquid market or in a less desirable venue. The varying offset may correct for an imbalance in spread credits due to special charges from intra spreading.

Claims

1. A method of analyzing risk in a portfolio, the portfolio including at least two of a plurality of products traded on an exchange, the method comprising:

determining a correlation between first and second products of the at least two products;

computing a first risk offset based on the correlation;

assigning the first risk offset to the first product;

computing a second risk offset based on the correlation and a compensating factor, the second risk offset being different from the first risk offset; and

assigning the second risk offset to the second product.

2. The method of claim 1, wherein the compensating factor comprises an asymmetry in the risk of the first product as compared to the second product.

3. The method of claim 1, wherein the compensating factor comprises a correction.

4. The method of claim 1, wherein the first and second products form a calendar spread.

5. The method of claim 1, wherein the first and second products form a butterfly spread.

6. A system for analyzing risk in a portfolio, the portfolio including at least two of a plurality of products traded on an exchange, the system comprising:

A correlation processor operative to determine a correlation-between first and second products of the at least two products;

An offset generator coupled with the correlation processor and operative to compute a first risk offset based on the correlation and assign the first risk offset to the first product, the offset generator being further operative to compute a second risk offset based on the correlation and a compensating factor, the second risk offset being different from the first risk offset and assign the second risk offset to the second product; and

a risk processor coupled with the offset generator and operative to compute a risk assessment of the portfolio based on at least the first and second risk offsets.

7. The system of claim 6, wherein the compensating factor comprises an asymmetry in the risk of the first product as compared to the second product.

8. The system of claim 6, wherein the compensating factor comprises a correction.

9. The system of claim 6, wherein the first and second products form a calendar spread.

10. The system of claim 6, wherein the first and second products form a butterfly spread.

11. A system for analyzing risk in a portfolio, the portfolio including at least two of a plurality of products traded on an exchange, the system comprising:

means for determining a correlation between first and second products of the at least two products;

means for computing a first risk offset based on the correlation;

means for assigning the first risk offset to the first product;

means for computing a second risk offset based on the correlation and a compensating factor, the second risk offset being different from the first risk offset; and

means for assigning the second risk offset to the second product.