SYSTEM AND METHOD FOR CREATING AND TRADING A DERIVATIVE INVESTMENT INSTRUMENT OVER A RANGE OF INDEX VALUES

• US 20090063362A1
• Filed: 09/04/2007
• Published: 03/05/2009
• Est. Priority Date: 09/04/2007
• Status: Active Grant

• Current Assignee: Cboe Exchange, Inc. (Cboe Global Markets, Inc.)
• Original Assignee: Chicago Board Options Exchange Incorporated (Cboe Global Markets, Inc.)
• Inventors: Speth, William, O'Connell, Marty, Hiatt, John JR.
• Granted Patent: US 8,165,953 B2
• Time in Patent Office: Days
• US Class Current: 705/36.R
• CPC Class Codes: G06Q 20/10 specially adapted for electronic funds transfer [EFT] systems; specially adapted for home banking systems
• CPC Class Codes: G06Q 30/0611 Request for offers or quotes
• 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
• CPC Class Codes: G06Q 40/12 Accounting
• CPC Class Codes: G06Q 40/123 Tax preparation or submission

Abstract

An investment instrument based on a range of index values is disclosed that allows investors to take risk positions relative to the size, or length, of the range. The investment instrument has a monetary value that increases as the index value increases within a low range interval of the range, decreases as the index value increases within a high range interval of the range, and is fixed or capped if the index value falls within a middle range interval of the range. Typically, one settlement amount will be zero and the other will be an amount greater than the investment instrument price.

Claims

1. A computer implemented method of creating a derivative investment instrument comprising:

determining a range interval, the range interval having a value corresponding to at least a portion of an identified range length; and

creating a derivative investment instrument having a monetary value that increases as the index value increases within a low range interval, decreases as the index value increases within a high range interval, and is capped if the index value falls on or within a middle range interval.

2. The method according to claim 1, wherein the range length is the entire range of values of the underlying index for which the financial instrument pays a positive amount if a settlement value of the index falls within the range length at expiration of the financial instrument.

3. The method according to claim 1, wherein the range interval is an interval amount that is used to determine the range increments of the low range and the high range.

4. The method according to claim 1, wherein the derivative investment instrument is an option contract.

5. The method according to claim 1, wherein the derivative investment instrument is a fixtures contract.

6. A computer-readable memory comprising processor executable program instructions for executing the steps of:

determining a range length and a range interval, the range length corresponding to a range of index values of an index and the range interval having a value corresponding to at least a portion of the range length;

establishing a derivative contract in which an investor will receive one of a first settlement amount and a second settlement amount depending on whether a strike price of the derivative contract is less than, within, or greater than the range length; and

settling the derivative contract according to whether the strike price of the derivative contract is less than, within, or greater than the range length at expiration of the derivative contract.

7. An exchange system configured for trading a derivative investment instrument, comprising:

an interface for receiving an incoming order to purchase the derivative instrument, the incoming order having a range length and range interval associated therewith;

a book memory for storing a plurality of previously received orders, the previously received orders each having the range length and range interval associated therewith;

a system memory for storing predefined condition parameters for a plurality of predefined states corresponding to a plurality of potential outcomes for the derivative instrument; and

a processor adapted to associate the plurality of previously received orders in the book memory with at least one of the predefined condition parameters, wherein the predefined condition parameters include at least one parameter for identifying an occurrence of at least one predefined state occurring before an expiration of the derivative instrument; and

the processor further adapted to calculate a zero payout value for orders having the at least one defined state that did not occur before the expiration of the derivative instrument and a greater than zero payout value for orders having at least one defined state that did occur prior to or at the expiration of the derivative instrument.

8. The exchange of claim 7, wherein the system memory further comprises allocating parameters for allocating orders among market participants.

9. The exchange of claim 8, wherein the processor is further configured to allocate the previously received orders based on the allocating parameters in the system memory and wherein the allocating parameters include parameters for allocating preferentially against orders with larger size.

10. The exchange of claim 9 wherein the derivative investment instrument comprises an option contract.

11. The exchange of claim 9, wherein the derivative investment instrument comprises a futures contract.

12. The exchange of claim 9, further comprising a clearing system in communication with the processor, the clearing system adapted to settle the derivative instrument.