Financial products having demand-based, adjustable returns, and trading exchange therefor

• US 7,389,262 B1
• Filed: 07/18/2000
• Issued: 06/17/2008
• Est. Priority Date: 07/21/1999
• Status: Active Grant

• Current Assignee: Longitude LLC
• Original Assignee: Longitude LLC
• Inventors: Lange, Jeffrey
• Primary Examiner(s): Kazimi; Hani M.
• Assistant Examiner(s): Karmis; Stefano
• Application Number:
  US09/744,816
• Time in Patent Office: 2,891 Days
• Field of Search: 705/35, 705/36.R, 705/37
• 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 40/03 Credit; Loans; Processing thereof
• 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

This invention provides methods and systems for trading and investing in groups of demand-based adjustable-return contingent claims, and for establishing markets and exchanges for such claims. (FIG. 2, item 262, 263, 264, 265) The advantages of the present invention, as applied to the derivative securities and similar financial markets, include increased liquidity, reduced credit risk, improved information aggregation, increased price transparency, reduced settlement or clearing costs, reduced hedging costs, reduced model risk, reduced event risk, increased liquidity incentives, improved self-consistency, reduced influence by market makers, and increased ability to generate and replicate arbitrary payout distributions. In addition to the trading of derivative securities, the present invention also facilitates the trading of other financial-related contingent claims; non-financial-related contingent claims such as energy, commodity, and weather derivatives; traditional insurance and reinsurance contracts; and contingent claims relating to events which have generally not been readily insurable or hedgeable such as corporate earnings announcements, future semiconductor demand, and changes in technology.

Claims

1. A method for conducting demand-based trading, comprising the steps of:

establishing a plurality of defined states and a plurality of predetermined termination criteria, wherein each of the defined states corresponds to at least one possible outcome of an event of economic significance;

accepting, prior to fulfillment of all of the predetermined termination criteria, an investment of value units by each of a plurality of traders in at least one of the plurality of defined states wherein at least one investment of value units is a multi-state investment that designates a set of defined states; and

allocating a payout to each investment, responsive to

the total number of the value units invested in the plurality of defined states,

the relative number of the value units invested in each of the plurality of defined states, and

an identification of the defined state that occurred upon the fulfillment of all of the predetermined termination criteria.

3. The method for conducting demand-based trading of claims 1 or 2, wherein at least one multi-state investment designates a set of desired returns responsive to the designated set of defined states, and wherein the allocating step is further responsive to the set of desired returns.

4. The method for conducting demand-based trading of claim 3, wherein each desired return of the set of desired returns is responsive to a subset of the designated set of defined states.

5. The method for conducting demand-based trading of claim 3, wherein the set of desired returns approximately corresponds to expected returns from a set of defined states of a prespecified investment vehicle.

6. The method for conducting demand-based trading of claim 3, wherein the allocating step comprises the step of calculating the required number of value units of the multi-state investment that designates a set of desired returns, and the step of distributing the value units of the multi-state investment that designates a set of desired returns to the plurality of defined states.

7. The method for conducting demand-based trading of claim 6, wherein the allocating step further comprises the step of solving a set of simultaneous equations that relate traded amounts to unit payouts and payout distributions;

and wherein the calculating step and the distributing step and responsive to the solving step.

8. The method for conducting demand-based trading of claim 7, wherein the solving step comprises the step of fixed point iteration.

9. The method for conducting demand-based trading of claim 8, wherein the step of fixed point iteration comprises the steps of:

selecting an equation of the set of simultaneous equations, the equation having an independent variable and at least one dependent variable;

assigning arbitrary values to each of the dependent variables in the selected equation;

calculating the value of the independent variable in the selected equation responsive to the currently assigned values of each of the dependent variables;

assigning the calculated value of the independent variable to the independent variable;

designating an equation of the set of simultaneous equations as the selected equation; and

sequentially performing the calculating the value step, the assigning the calculated value step, and the designating an equation step until the value of each of the variables converges.

2. A method for conducting demand-based trading, comprising the steps of:

establishing a plurality of defined states and a plurality of predetermined termination criteria, wherein each of the defined states corresponds to a possible state of a selected financial product when each of the predetermined termination criteria is fulfilled;

accepting, prior to fulfillment of all of the predetermined termination criteria, an investment of value units by each of a plurality of traders in at least one of the plurality of defined states wherein at least one investment of value units is a multi-state investment that designates a set of defined states; and

allocating a payout to each investment, responsive to

the total number of the value units invested in the plurality of defined states,

the relative number of the value units invested in each of the plurality of defined states, and

an identification of the defined states that occurred upon the fulfillment of all of the predetermined termination criteria.