System and Method for Creating and Trading a Digital Derivative Investment Instrument

• US 20100153254A1
• Filed: 10/07/2009
• Published: 06/17/2010
• Est. Priority Date: 10/08/2008
• Status: Active Grant

• Current Assignee: Cboe Exchange, Inc. (Cboe Global Markets, Inc.)
• Original Assignee: Chicago Board Options Exchange Incorporated (Cboe Global Markets, Inc.)
• Inventors: SHALEN, Catherine T.
• Granted Patent: US 8,788,381 B2
• Time in Patent Office: Days
• US Class Current: 705/37
• 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

An investment instrument is disclosed that 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 derivatives contract, a long investor agrees to pay a short investor a contract 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 derivatives contract price.

Claims

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

establishing a plurality of credit event categories with a digital derivative contract definition module in an exchange backend system, wherein an entity'"'"'s credit event status is associated with at least one of said plurality of credit event categories;

establishing, with a binary variable monitoring module, a digital derivative contract based on the entity and having a premium in which an investor will receive one of a first settlement amount when the entity is associated with a credit event status or a second settlement amount when the entity is not associated with the credit event status; and

calculating a settlement amount for the digital derivative contract with a settlement calculation module in the exchange backend system according to whether the credit event status is associated with the entity or not associated with to the entity.

2. The method according to claim 1 wherein the plurality of credit event categories includes bankruptcy.

3. The method according to claim 1 wherein the plurality of credit event categories includes a non-payment of a debt.

4. The method according to claim 1 wherein the entity is a corporation.

5. The method according to claim 1 wherein the entity is a sovereign entity.

6. The method according to claim 1 wherein the entity is a component of an index.

7. The method according to claim 1 wherein the premium is amortized as a periodic premium payment until either a Credit Event or Redemption Event in the debt of the Reference Entity is confirmed, or until the expiration of the contract if no Credit Event or Redemption Event is confirmed before expiration.

8. The method of claim 1 further comprising:

amortizing the premium as a periodic premium payment until either a predefined event or a redemption in the debt of the entity is confirmed, or until the expiration of the contract if no predefined event or a redemption is confirmed before expiration.

9. The method according to claim 8 wherein the entity is a corporation.

10. The method according to claim 8 wherein the entity is an index.

11. An exchange backend system for trading digital derivatives comprising:

a digital derivative contract definition module configured to store digital derivative contract data for a digital derivative contract to be traded on a trading platform;

a pricing data accumulation and dissemination module configured to receive contract data from the digital derivative contract definition module and transaction data from a matching engine; and

a settlement calculation module configured to receive a state of a binary variable from a binary variable monitoring module,

wherein on a settlement date the settlement calculation module calculates a settlement amount based on the state of the binary variable.

12. The exchange backend system of claim 11, wherein the settlement calculation module forwards the settlement amount to a clearing system performing a final mark-to-market on a member firms'"'"' accounts to settle the digital derivative contract.

13. The exchange backend system of claim 11, wherein the digital derivative contract is a digital option contract.

14. The exchange backend system of claim 11, wherein the digital derivative contract is based on a credit default rating service.

15. The exchange backend system of claim 11, wherein the digital derivative contract is created around a binary question.

16. The exchange backend system of claim 11, wherein the digital derivative contract is an index credit event options contract.

17. The exchange backend system of claim 11, wherein the digital derivative contract is based on terms of credit default swaps.