System and method for asymmetric offsets in a risk management system

• US 7,509,275 B2
• Filed: 01/07/2005
• Issued: 03/24/2009
• Est. Priority Date: 09/10/2004
• Status: Active Grant

• Current Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Original Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Inventors: Glinberg, Dmitriy, Yoo, Tae S., Michaels, Dale A., Gogol, Edward
• Primary Examiner(s): Kazimi; Hani
• Assistant Examiner(s): Hammond, III; Thomas M
• Application Number:
  US11/030,833
• Publication Number:
  US 20060059066A1
• Time in Patent Office: 1,537 Days
• Field of Search: 705 35- 40
• 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
• CPC Class Codes: G06Q 40/08 Insurance

Abstract

A system and method for using asymmetrical offsets for products in a risk management analysis system are disclosed. Conventional systems assign symmetrical offsets for products, that is, if two products have an 80% correlation they each would be assigned an offset of 80% with respect to each other. However, it is desirable to allow for asymmetrical offsets. In the disclosed system and method, when two products have a correlation of 80%, one may be assigned an offset of 75% and the other may be assigned an offset of 80%. There are many reasons to vary the offset between the products. The varying offset may reflect an asymmetry in the risk in one of the products, such as being traded in an illiquid market or in a less desirable venue. The varying offset may correct for an imbalance in spread credits due to special charges from intra spreading.

Claims

1. A computer implemented method of analyzing risk in a portfolio, the portfolio including at least two of a plurality of products traded on an exchange, the method comprising:

determining, in a computer, a correlation between first and second products of the at least two products, the first product being associated with a first margin requirement and the second product being associated with a second margin requirement;

computing, by the computer, a first risk offset based on the correlation, the first risk offset comprising an adjustment to the first margin requirement;

assigning, by the computer, the first risk offset to the first product;

computing, by the computer, a second risk offset based on the correlation and a compensating factor, the second risk offset being different from the first risk offset, the second risk offset comprising an adjustment to the second margin requirement;

assigning, by the computer, the second risk offset to the second product; and

computing, by the computer, a combined margin requirement for the first and second products as the sum of the first margin requirement for the first product adjusted as a function of the first risk offset and a the second margin requirement for the second product adjusted as a function of the second risk offset.

2. The computer implemented method of claim 1, wherein the compensating factor comprises an asymmetry in the risk of the first product as compared to the second product.

3. The computer implemented method of claim 1, wherein the compensating factor comprises a correction.

4. The computer implemented method of claim 1, wherein the first and second products form a calendar spread.

5. The computer implemented method of claim 1, wherein the first and second products form a butterfly spread.

6. A system for analyzing risk in a portfolio, the portfolio including at least two of a plurality of products traded on an exchange, the system comprising:

a processor configured to determine a correlation between first and second products of the at least two products, the first product being associated with a first margin requirement and the second product being associated with a second margin requirement;

the processor being further configured to compute a first risk offset based on the correlation, the first risk offset comprising an adjustment to the first margin requirement, and assign the first risk offset to the first product, the processor being further configured to compute a second risk offset based on the correlation and a compensating factor, the second risk offset being different from the first risk offset, the second risk offset comprising an adjustment to the second margin requirement, and assign the second risk offset to the second product; and

the processor being further configured to compute a risk assessment of the portfolio based on at least the first and second risk offsets and further compute a combined margin requirement for the first and second products as the sum of a the first margin requirement for the first product adjusted as a function of the first risk offset and a the second margin requirement for the second product adjusted as a function of the second risk offset.

7. The system of claim 6, wherein the compensating factor comprises an asymmetry in the risk of the first product as compared to the second product.

8. The system of claim 6, wherein the compensating factor comprises a correction.

9. The system of claim 6, wherein the first and second products form a calendar spread.

10. The system of claim 6, wherein the first and second products form a butterfly spread.