System and method for creating and trading a digital derivative investment instrument

• US 20060253355A1
• Filed: 05/04/2005
• Published: 11/09/2006
• Est. Priority Date: 05/04/2005
• Status: Abandoned Application

• Current Assignee: Chicago Board Options Exchange Incorporated (Cboe Global Markets, Inc.)
• Original Assignee: Chicago Board Options Exchange Incorporated (Cboe Global Markets, Inc.)
• Inventors: Shalen, Catherine T.
• Application Number:
  US11/122,659
• Publication Number:
  US 20060253355A1
• 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

Abstract

The present invention relates to an investment instrument which allows investors to take risk positions relative to the occurrence or non-occurrence of a contingent binary event. The contingent binary event will have one of two possible outcomes. In a digital futures contract, a long investor agrees to pay a short investor a contract futures amount in return for the short investor agreeing to pay the long investor one of two different settlement amounts depending on the outcome as the contingent binary event. Typically one settlement amount will be zero and the other will be an amount greater than the futures price.

Claims

1. A method of creating a financial instrument comprising:

identifying a variable that will assume one of a first state and a second state at a designated time;

establishing a contract between a first investor and a second investor in which the first investor agrees to pay a futures price to the second investor and the second investor agrees to pay to the first investor one of a first settlement amount and a second settlement amount, depending on whether the variable has assumed the first state or the second state;

determining which of the first state and the second state the variable has assumed at the designated time; and

settling the contract according to the state assumed by the variable.

2. The method of claim 1 wherein the step of settling the contract comprises the first investor paying the futures price to the second investor and the second investor paying the first settlement amount to the first investor if the variable has assumed the first state, and the second settlement amount if the variable has assumed the second state.

3. The method of claim 1 wherein the first settlement amount is zero and the second settlement amount is a non-zero value greater than the futures price.

4. The method of claim 3 wherein the step of settling the contract corresponds to the first investor paying the futures price to the second investor when the variable assumes the first state at the designated time.

5. The method of claim 3 wherein the step of settling the contract comprises the second investor paying the first investor the second settlement less the futures price.

6. The method of claim 1 wherein the variable relates to the occurrence of a defined contingent event, the first state corresponding to the non-occurrence of the event as of the designated time and the second state corresponding to the occurrence of the event as of the designated time.

7. The method of claim 6 wherein the contingent event comprises a second variable having achieved a predefined value.

8. The method of claim 7 wherein the second variable comprises a market index.

9. The method of claim 7 wherein the second variable comprises the price of an underlying asset.

10. The method of claim 7 wherein the second variable comprises the value of an economic indicator.

11. The method of claim 6 wherein the contingent event comprises a specified action of an organization.

12. A method of trading digital futures contracts comprising defining a standard digital futures contract having one of a first settlement amount and a second settlement amount, contingent on the state of a digital variable on a specified date;

accepting long positions and short positions and matching at least one long investor with at least one short investor to form at least one digital futures contract based on said standard digital futures contract;

determining the state of the digital variable on the specified date; and

settling the at least one digital futures contract.

13. The method of claim 12 wherein an investor taking a long position agrees to pay a futures price in return for the obligation of a short investor to pay one of the first and second settlement amounts depending on the state of the digital variable on the specified date.

14. The method of claim 13 wherein the first settlement amount is zero.

15. The method of claim 13 wherein the second settlement amount is an amount greater than the futures price.

16. The method of claim 12 wherein the digital variable takes on a first state if a specified event occurs and a second state if the specified event does not occur.

17. The method of claim 16 wherein the specified event comprises a numeric variable rising above a threshold value.

18. A method of investing in the occurrence or non-occurrence of a contingent event, comprising:

a first investor agreeing with a second investor to pay a futures price to the second investor in exchange for the second investor agreeing to pay one of a first amount and a second amount depending on whether the contingent event occurs or does not occur;

determining whether the event occurs or does not occur;

the first investor settling with the second investor based on the determination whether the event occurred or did not occur.

19. The method of claim 18 wherein the contingent event comprises a share price rising above a threshold.

20. The method of claim 18 wherein the contingent event comprises a share price falling below a threshold.

21. The method of claim 18 wherein the contingent event comprises a market indicator rising above threshold.

22. The method of claim 18 wherein the contingent event comprises a market indicator falling below a threshold.

23. The method of claim 18 wherein the contingent event comprises a regulatory body taking a specified action.

24. The method of claim 18 wherein the contingent event comprises an interest rate rising above a threshold.

25. The method of claim 18 wherein the contingent event comprises an interest rate falling below a threshold.

26. The method of claim 18 wherein the contingent event comprises an economic indicator rising above a threshold.

27. The method of claim 18 wherein the contingent event comprises an economic indicator falling below a threshold.

28. The method of claim 18 wherein the first amount agreed to be paid by the second investor to the first investor depending on whether the contingent event occurs or not is zero and the second amount is an amount greater than the futures prices.

29. The method of claim 28 wherein the first investor settling with the second investor comprises the first investor paying the second investor the futures price if the contingent event does not occur, and the second investor paying the first investor the second amount less the futures price if the contingent event does occur.

30. A system for creating a digital futures contract to be traded on an exchange, the system comprising:

a contract definition module for receiving user input and defining terms of a digital futures contract, including a binary variable and first and second settlement amounts, one of which is to be paid by a first party to a second party based on a state of the binary variable;

a pricing data accumulation and dissemination module for receiving price data based on executed trades of said digital futures contracts, and disseminating said pricing data to investors;

a binary variable monitoring module for determining the state of the binary variable; and

a settlement calculation model for calculating a settlement amount based on the state of the binary variable at expiration of the digital futures contract.

31. A method of creating a financial instrument comprising:

identifying an underling asset for a digital option contract;

establishing the digital option contract in which an investor will receive one of a first settlement amount and a second settlement depending on whether a strike price of the digital option contract is less than, equal to, or greater than the value of the underlying asset at expiration of the digital option contract;

determining whether the strike price of the digital option contract is less than, equal to, or greater than the value of the underlying asset at expiration of the digital option contract; and

settling the contract according to whether the strike price of the digital option contract is less than, equal to, or greater than the value of the underlying asset at expiration of the digital option contract.

32. The method of claim 31, wherein:

the digital option contract is a digital call option contract;

the investor receives the first settlement amount if the strike price of the digital call option contract is less than or equal to the value of the underlying asset at expiration of the digital call option contract; and

the investor receives the second settlement amount if the strike price of the digital call option contract is greater than the value of the underlying asset at expiration of the digital call option contract.

33. The method of claim 32, wherein the first settlement amount is a non-zero value and the second settlement amount is zero.

34. The method of claim 31, wherein:

the digital option contract is a digital put option contract;

the investor receives the first settlement amount if the strike price of the digital call option contract is greater than or equal to the value of the underlying asset at expiration of the digital put option contract; and

the investor receives the second settlement amount if the strike price of the digital call option contract is less than the value of the underlying asset at expiration of the digital put option contract.

35. The method of claim 34, wherein the first settlement amount is a non-zero value and the second settlement amount is zero.

36. The method of claim 31, wherein the underlying asset is an economic indicator.

37. A system for creating a digital option contract to be traded on an exchange, the system comprising:

a contract definition module for receiving user input and defining terms of a digital option contract, including an underlying asset, a strike price, and first and second settlement amounts, the first and second settlement amounts paid to an investor depending on whether the strike price is less than, equal to, or greater than the value of the underlying asset at expiration of the digital option contract;

a pricing data accumulation and dissemination module for receiving price data based on executed trades of said digital options contracts, and disseminating said pricing data to investors;

a binary variable monitoring module for determining the state of the strike price in relation to the value of the underlying asset; and

a settlement calculation model for calculating a settlement amount based on the state of the strike price in relation to the value of the underlying asset at expiration of the digital option contract.

38. The system of claim 37, wherein:

the digital option contract is a digital call option contract;

the investor receives the first settlement amount if the strike price of the digital call option contract is less than or equal to the value of the underlying asset at expiration of the digital call option contract; and

the investor receives the second settlement amount if the strike price of the digital call option contract is greater than the value of the underlying asset at expiration of the digital call option contract.

39. The system of claim 38, wherein the first settlement amount is a non-zero value and the second settlement amount is zero.

40. The system of claim 37, wherein:

the digital option contract is a digital put option contract;

the investor receives the first settlement amount if the strike price of the digital call option contract is greater than or equal to the value of the underlying asset at expiration of the digital put option contract; and

the investor receives the second settlement amount if the strike price of the digital call option contract is less than the value of the underlying asset at expiration of the digital put option contract.

41. The system of claim 40, wherein the first settlement amount is a non-zero value and the second settlement amount is zero.

42. The system of claim 37, wherein the underlying asset is an economic indicator.