Method, system, and computer program product for trading interest rate swaps

• US 6,304,858 B1
• Filed: 12/11/1998
• Issued: 10/16/2001
• Est. Priority Date: 02/13/1998
• Status: Expired due to Term

• Current Assignee: Adams Viner and Mosler Limited
• Original Assignee: Adams Viner and Mosler Limited
• Inventors: Sherman, James M., Mosler, Warren B., McCauley, William P.
• Primary Examiner(s): Miller, J.
• Assistant Examiner(s): ROSEN, NICHOLAS D
• Application Number:
  US09/209,746
• Time in Patent Office: 1,040 Days
• Field of Search: 705/35, 705/37
• US Class Current: 705/37
• CPC Class Codes: G06Q 30/0601 Electronic shopping [e-shopping]
• 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

Abstract

A method, system, computer program product, and data structure for trading in which a standardized contract is traded. The contract obligates a buyer and a seller to settle the contract based on a price of the contract at a first effective date. The contract is traded through an exchange that guarantees payment to the buyer of any amount owed to the buyer from the seller as a result of the contract and that guarantees payment to the seller of any amount owed to the seller from the buyer as a result of the contract. The price of the contract is determined based on preselected notional cash flows discounted by an interest rate swap curve obtained from a preselected swap rate source.

Claims

1. A computer implemented method of trading, comprising the steps of:

trading a standardized contract obligating a buyer and a seller to settle the contract based on a price of the contract at a first effective date, through an exchange that guarantees payment to the buyer of any amount owed to the buyer from the seller as a result of the contract and that guarantees payment to the seller of any amount owed to the seller from the buyer as a result of the contract; and

determining the price of the contract based on preselected notional cash flows discounted by an interest rate swap curve obtained from a preselected swap rate source.

2. The method of claim 1, further comprising the step of:

selecting the swap rate source from a floating rate index selected from the group consisting of LIBOR, EURIBOR, and TIBOR.

3. The method of claim 1, wherein the exchange is a futures exchange and the trading step comprises the step of:

trading the contract through the futures exchange in an exchange-based trading system.

4. The method of claim 1, wherein the exchange is a clearing agent and the trading step comprises the step of:

trading the contract through the clearing agent in an over-the-counter trading system.

5. The method of claim 1, wherein the trading step comprises the step of:

transmitting trade data between the buyer and the exchange and between the seller and the exchange via a system of networked computers, said trade data including information relating to the contract.

6. The method of claim 5, wherein said system of networked computers is a wide area network and the transmitting step comprises the step of:

transmitting trade data between the buyer and the exchange and between the seller and the exchange via the wide area network, said trade data including information relating to the contract.

7. The method of claim 6, wherein said wide area network is the Internet and the transmitting step comprises the step of:

transmitting trade data between the buyer and the exchange and between the seller and the exchange via the Internet, said trade data including information relating to the contract.

8. The method of claim 1, further comprising the step of:

automatically rolling the contract over after the first effective date to a second effective date at which said buyer and seller are obligated to settle based on the price of the contract at the second effective date.

9. The method of claim 1, wherein said determining step comprises the step of:

determining the price of the contract based on a preselected government bond from which the preselected notional cash flows are derived, said government bond having a fixed coupon rate and a face value that provide the notional cash flows.

10. The method of claim 1, wherein the determining step comprises the steps of:

generating a zero coupon curve based on the interest rate swap curve;

generating discount factors corresponding to time periods in which respective of said notional cash flows occur, based on the zero coupon curve; and

multiplying the discount factors by each corresponding notional cash flow.

11. The method of claim 1, wherein the determining step comprises the step of:

determining the price of the contract at the first effective date;

and wherein the method further comprises;

settling the contract on the first effective date based on the price of the contract determined at the first effective date.

12. The method of claim 1, wherein the determining step comprises the step of:

determining the price of the contract daily at the close of trading;

and wherein the method further comprises;

settling daily based on the price determined at the close of trading.

13. A computer implemented method of trading, comprising the steps of:

trading an option to trade a standardized contract at a specified strike price by a specified date, said contract obligating a buyer and a seller to settle the contract based on a price of the contract at a first effective date, through an exchange that guarantees payment to the buyer of any amount owed to the buyer from the seller as a result of the contract and that guarantees payment to the seller of any amount owed to the seller from the buyer as a result of the contract;

determining the price of the contract based on preselected notional cash flows discounted by an interest rate swap curve obtained from a preselected swap rate source; and

settling the option based on the difference between the determined price of the contract and the specified strike price.

14. A computer implemented system for trading, comprising:

means for trading a standardized contract obligating a buyer and a seller to settle the contract based on a price of the contract at a first effective date, through an exchange that guarantees payment to the buyer of any amount owed to the buyer from the seller as a result of the contract and that guarantees payment to the seller of any amount owed to the seller from the buyer as a result of the contract; and

means for determining the price of the contract based on preselected notional cash flows discounted by an interest rate swap curve obtained from a preselected swap rate source.

15. The system of claim 14, further comprising:

means for receiving the swap rate source from a floating rate index selected from the group consisting of LIBOR, EURIBOR, and TIBOR.

16. The system of claim 14, wherein the exchange is a futures exchange and the means for trading comprises:

means for trading the contract through the futures exchange in an exchange-based trading system.

17. The system of claim 14, wherein the exchange is a clearing agent and the means for trading comprises:

means for trading the contract through the clearing agent in an over-the-counter trading system.

18. The system of claim 14, wherein the means for trading comprises:

means for transmitting trade data between the buyer and the exchange and between the seller and the exchange via a system of networked computers, said trade data including information relating to the contract.

19. The method of claim 18, wherein said system of networked computers is a wide area network and the means for transmitting trade data via the system of networked computers comprises:

means for transmitting trade data between the buyer and the exchange and between the seller and the exchange via the wide area network, said trade data including information relating to the contract.

20. The system of claim 19, wherein said wide area network is the Internet and the means for transmitting trade data via the wide area network comprises:

means for transmitting trade data between the buyer and the exchange and between the seller and the exchange via the Internet, said trade data including information relating to the contract.

21. The system of claim 14, further comprising:

means for automatically rolling the contract over after the first effective date to a second effective date at which said buyer and seller are obligated to settle based on the price of the contract at the second effective date.

22. The system of claim 14, wherein said means for determining comprises:

means for determining the price of the contract based on a preselected government bond from which the preselected notional cash flows are derived, said government bond having a fixed coupon rate and a face value that provide the notional cash flows.

23. The system of claim 14, wherein said means for determining comprises:

means for generating a zero coupon curve based on the interest rate swap curve;

means for generating discount factors corresponding to time periods in which respective of said notional cash flows occur, based on the zero coupon curve; and

means for multiplying the discount factors by each corresponding notional cash flow.

24. The system of claim 14, wherein the means for determining comprises:

means for determining the price of the contract at the first effective date;

and wherein the system further comprises;

means for settling the contract on the first effective date based on the price of the contract determined at the first effective date.

25. The system of claim 14, wherein the means for determining comprises:

means for determining the price of the contract daily at the close of trading;

and wherein the system further comprises;

means for settling daily based on the price determined at the close of trading.

26. A computer implemented system for trading, comprising:

means for trading an option to trade a standardized contract at a specified strike price by a specified date, said contract obligating a buyer and a seller to settle the contract based on a price of the contract at a first effective date, through an exchange that guarantees payment to the buyer of any amount owed to the buyer from the seller as a result of the contract and that guarantees payment to the seller of any amount owed to the seller from the buyer as a result of the contract;

means for determining the price of the contract based on preselected notional cash flows discounted by an interest rate swap curve obtained from a preselected swap rate source; and

means for settling the option based on the difference between the determined price of the contract and the specified strike price.

27. A computer readable medium containing program instructions for execution on a computer system, which when executed by a computer, cause the computer to perform method steps for trading a contract, said method comprising the steps of:

trading a standardized contract obligating a buyer and a seller to settle the contract based on a price of the contract at a first effective date, through an exchange that guarantees payment to the buyer of any amount owed to the buyer from the seller as a result of the contract and that guarantees payment to the seller of any amount owed to the seller from the buyer as a result of the contract; and

determining the price of the contract based on preselected notional cash flows discounted by an interest rate swap curve obtained from a preselected swap rate source.

28. The computer readable medium of claim 27, further comprising computer-executable instructions for causing the computer to perform the step of:

receiving the swap rate source from a floating rate index selected from the group consisting of LIBOR, EURIBOR, and TIBOR.

29. The computer readable medium of claim 27, wherein the exchange is a futures exchange and the trading step comprises the step of:

trading the contract through the futures exchange in an exchange-based trading system.

30. The computer readable medium of claim 27, wherein the exchange is a clearing agent and the trading step comprises the step of:

trading the contract through the clearing agent in an over-the-counter trading system.

31. The computer readable medium claim 27, wherein the trading step comprises the step of:

transmitting trade data between the buyer and the exchange and between the seller and the exchange via a system of networked computers, said trade data including information relating to the contract.

32. The computer readable medium of claim 31, wherein said system of networked computers is a wide area network and the transmitting step comprises the step of:

transmitting trade data between the buyer and the exchange and between the seller and the exchange via the wide area network, said trade data including information relating to the contract.

33. The computer readable medium of claim 32, wherein said wide area network is the Internet and the transmitting step comprises the step of:

transmitting trade data between the buyer and the exchange and between the seller and the exchange via the Internet, said trade data including information relating to the contract.

34. The computer readable medium of claim 27, further comprising program instructions for causing the computer to perform the step of:

automatically rolling the contract over after the first effective date to a second effective date at which said buyer and seller are obligated to settle based on the price of the contract at the second effective date.

35. The computer readable medium of claim 27, wherein said determining step comprises the step of:

determining the price of the contract based on a preselected government bond from which the preselected notional cash flows are derived, said government bond having a fixed coupon rate and a face value that provide the notional cash flows.

36. The computer readable medium of claim 27, wherein the determining step comprises the steps of:

generating a zero coupon curve based on the interest rate swap curve;

generating discount factors corresponding to time periods in which respective of said notional cash flows occur, based on the zero coupon curve; and

multiplying the discount factors by each corresponding notional cash flow.

37. The computer readable medium of claim 27, wherein the determining step comprises the step of:

determining the price of the contract at the first effective date;

and wherein the computer readable medium further comprises computer-executable instructions for causing the computer to perform the step of;

settling the contract on the first effective date based on the price of the contract determined at the first effective date.

38. The computer readable medium of claim 27, wherein the determining step comprises the step of:

determining the price of the contract daily at the close of trading;

and wherein the computer readable medium further comprises computer-executable instructions for causing the computer to perform the step of;

settling daily based on the price determined at the close of trading.

39. A computer readable medium containing program instructions for execution on a computer system, which when executed by a computer, cause the computer to perform method steps for trading a contract, said method comprising the steps of:

trading an option to trade a standardized contract at a specified strike price by a specified date, said contract obligating a buyer and a seller to settle the contract based on a price of the contract at a first effective date, through an exchange that guarantees payment to the buyer of any amount owed to the buyer from the seller as a result of the contract and that guarantees payment to the seller of any amount owed to the seller from the buyer as a result of the contract;

determining the price of the contract based on preselected notional cash flows discounted by an interest rate swap curve obtained from a preselected swap rate source; and

settling the option based on the difference between the determined price of the contract and the specified strike price.