System, method, and computer program for creating and valuing financial insturments linked to average credit spreads

• US 20060143099A1
• Filed: 09/23/2004
• Published: 06/29/2006
• Est. Priority Date: 09/23/2004
• Status: Abandoned Application

• Current Assignee: World RISK Group LLC
• Original Assignee: World RISK Group LLC
• Inventors: O'Malley, Sean, Mejevitch, Maria, Haq, Kam, Partlow, Daniel
• Application Number:
  US10/751,086
• Publication Number:
  US 20060143099A1
• 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 40/06 Asset management; Financial planning or analysis

Abstract

A system, method and computer program for creating and valuing financial instruments (including but not limited to futures, forwards, call options, put options, swaps, “swaptions”, and “op-swaps”) linked to average credit spread information. The present invention will be referred to in this application as an average credit spread-linked financial instrument, and is defined as a financial instrument whose value changes based on movements in underlying average credit spreads. These average credit spreads may be calculated, or may already be published by sovereign governments, government-chartered agencies and departments (ex. U.S. Treasury Department), non-governmental organizations, commercial banks, investment banks, and many other organizations. The instruments can be written, with a published average credit spread number as the initial value upon which the financial instrument'"'"'s terms are based. The predicted future value of said credit spread will change in response to market buy/sell demand based on investor expectations of said predicted future value of said credit spread related to one or more credit spread-linked financial instrument(s). Thus, the predicted future value of said spread will change in response to said market demand as investors offer to buy and/or sell credit spread-linked financial instruments which will be listed on securities exchanges and electronic commerce networks (ECNs) as well as over the counter (OTC) and in private transactions. Each predicted future average credit spread value will change based on said investor expectation of how strong demand will be for the underlying average credit spread involved. Thus, the present invention gives investors a means of taking or adjusting positions upon average credit spread changes in market segments defined by geography, credit history, industry type, industry size, firm size, provision of collateral, third-party guarantee, or type of debt obligation. It is important to note credit spread-linked financial instruments can be created either in standardized contract sizes that can be traded on futures, options or other securities exchanges, ECNs and/or OTC, or can be customized to meet the specifications of a transactional counterparty which wishes to speculate on movements in market segments defined by geography, credit history, industry type, industry size, firm size, provision of collateral, third-party guarantee, or type of debt obligation. Such instruments may also be created from a plurality of spreads, thus allowing an investor to package movements from several different credit spreads into a single financial instrument. Such instruments may also involve a combination of credit spread-linked financial instruments, either with each other or with other financial instruments in a combination containing at least one credit spread-linked financial instrument.

Claims

1. A method for creating and valuing financial instruments based upon average credit spreads which compile average credit spread information in market segments defined by geography, credit history, industry type, industry size, firm size, provision of collateral, third-party guarantee, or type of debt obligation.

2. The method of claim 1, where the future value of said financial instrument is calculated by inputting historical average credit spread information and/or predicted future average credit spread information and/or financial information, interest rate(s), currency denomination(s), and start date and date of expiry of each contract into a pricing model including but not limited to trinomial, binomial, Monte Carlo simulation, or Black-Scholes model.

3. The method of claim 2, wherein said financial instrument may be comprised of multiple financial instruments involving at least one financial instrument based upon an average credit spread, or is based upon multiple average credit spreads for different market segments, including but not limited to asset-backed securities, basket options, chooser options, option chains, or rainbow options.

4. A method for disseminating information for a financial instrument related to at least one average credit spread, comprising the steps of:

a. quoting prices, historical average credit spread information and/or predicted future average credit spread information and/or metrics (ex. prices, open interest, 90-day volatility) on contracts of an average credit spread linked financial instrument.

b. using an information distribution medium, either physical or electronic, to disseminate said information of claim a. to users of this information.

5. A computer-implemented method for creating and valuing a financial instrument based upon average credit spreads which compile credit spread information in market segments defined by geography, credit history, industry type, industry size, firm size, provision of collateral, third-party guarantee, or type of debt obligation.

6. The method of claim 5, where the future value of said financial instrument is calculated by inputting historical average credit spread information and/or predicted future average credit spread information and/or financial information, interest rate(s), currency denomination(s), and start date and date of expiry of each contract into a pricing model including but not limited to trinomial, binomial, Monte Carlo simulation, or Black-Scholes model.

7. The method of claim 6, wherein said financial instrument may be comprised of multiple financial instruments involving at least one financial instrument based upon an average credit spread, or is based upon multiple average credit spreads for different market segments, including but not limited to asset-backed securities, basket options, chooser options, option chains, or rainbow options.

8. A computer-implemented method for determining the volatility of financial instruments based upon average credit spreads which compile credit spread information in market segments defined by geography, credit history, industry type, industry size, firm size, provision of collateral, third-party guarantee, or type of debt obligation.

9. The method of claim 8, where the volatility of said financial instrument is calculated by inputting historical average credit spread information and/or predicted future average credit spread information and/or financial information, interest rate(s), currency denomination(s), and start date and date of expiry of each contract into a pricing model including but not limited to trinomial, binomial, Monte Carlo simulation, or Black-Scholes model.

10. The method of claim 9, wherein said financial instrument may be comprised of multiple financial instruments involving at least one financial instrument based upon an average credit spread, or is based upon multiple average credit spreads for different market segments, including but not limited to asset-backed securities, basket options, chooser options, option chains, or rainbow options.

11. A computer system for creating and valuing a financial instrument based upon average credit spreads which compile credit spread information in market segments defined by geography, credit history, industry type, industry size, firm size, provision of collateral, third-party guarantee, or type of debt obligation., comprising:

a. a computer connected to an average credit spread history database and/or a predicted future average credit spread database and/or financial database that creates and values a financial instrument under conditions where the future value of said financial instrument is calculated by inputting historical average credit spread information and/or predicted future average credit spread information and/or financial information, interest rate(s), currency denomination(s), and start date and date of expiry of each contract into a pricing model including but not limited to trinomial, binomial. Monte Carlo simulation, or Black-Scholes model.

b. at least one workstation that allows a user to specify inputs that affect the value of the average credit spread financial instrument.

12. A computer program product comprising a computer-usable medium having control logic stored therein for causing a computer to perform valuation of average credit spread linked financial instruments, said control logic comprising:

a. a computer readable program code means that causes the computer to create and value a financial instrument based upon average credit spreads which compile credit spread information in market segments defined by geography, credit history, industry type, industry size, firm size, provision of collateral, third-party guarantee, or type of debt obligation.

b. a computer readable program code means for valuing a financial instrument based upon average credit spreads by inputting historical average credit spread information and/or predicted future average credit spread information and/or financial information, interest rate(s), currency denomination(s), start date and date of expiry of each contract, and/or cost of the financial instrument into a pricing model including but not limited to trinomial, binomial, Monte Carlo simulation, or Black-Scholes model.

c. the method of claim b., where the future value of said financial instrument is a defined currency amount and the initial value is calculated by utilizing computer readable program code for applying a pricing model using historical average credit spread information and/or predicted future average credit spread information and/or financial information, interest rate(s), currency denomination(s), and start date and date of expiry of each contract.