Portfolio hedging method

• US 7,805,353 B2
• Filed: 05/22/2001
• Issued: 09/28/2010
• Est. Priority Date: 05/22/2001
• Status: Active Grant

• Current Assignee: Morgan Stanley Services Group Inc. (Morgan Stanley)
• Original Assignee: Morgan Stanley
• Inventors: Woodley, John A. C.
• Primary Examiner(s): Kazimi; Hani M.
• Assistant Examiner(s): GRAHAM, CLEMENT B
• Application Number:
  US09/863,148
• Publication Number:
  US 20020178111A1
• Time in Patent Office: 3,416 Days
• Field of Search: 705 35- 38, 705/48, 364/400, 364/406
• 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
• CPC Class Codes: G06Q 40/08 Insurance

Abstract

A method and system is provided by which an entity manages an exposure to an economic risk associated with a commodity and initially includes the step of modeling the exposure to the risk using financial instruments such as forward contracts and option contracts. Next, a hedge for the exposure is executed. Liquidated cash flows, that are based on the modeled exposure and said hedge, are periodically calculated. If liquidated cash flows are positive, a payout is provided to the entity while a payout is received from the entity if the liquidated cash flows are negative. In an exemplary embodiment, the liquidated cash flows are marked to the market.

Claims

1. A computer-implemented method for managing a first entity'"'"'s exposure to an economic risk associated with a commodity, comprising the steps of:

forming, by at least one programmable processor, a model portfolio of said exposure, said model portfolio generating cash flow data;

forming, by said at least one programmable processor, a hedging portfolio for said exposure, said hedging portfolio generating cash flow data;

receiving, by said at least one programmable processor, benchmark cash flow data agreed to by said first entity and a second entity;

periodically combining, by said at least one programmable processor, said cash flow data of said model portfolio and said hedging portfolio;

calculating, by said at least one programmable processor, payout data based on a difference between said combined cash, flow data and said benchmark cash flow data and

outputting, by said at least one programmable processor, the payout data representing payments to be made between the first entity and the second entity.

2. The method of claim 1, wherein the step of forming a hedging portfolio further comprises

modeling at least one hedging transaction executed by said entity.

3. The method of claim 1, wherein said step of calculating payout data based on a difference between said combined cash flow data and said benchmark cash flow data includes the steps of:

calculating a payment to be provided to said first entity if said combined cash flow data is less than said benchmark cash flow data; and

calculating a payment to be received from said entity if said combined cash flow data is greater than said benchmark cash flow data.

4. The method of claim 3, further comprising calculating said payment is as a percentage of said difference between said combined cash flow data and said benchmark cash flow data.

5. The method of claim 3, further comprising determining if said difference between said combined cash flow data and said benchmark cash flow data is within or outside a band and said payment is calculated based on whether said difference is within or outside the band.

6. The method of claim 3, further comprising determining if said difference between said combined cash flow data and said benchmark cash flow data is greater than a defined level and said payment is calculated if said difference is greater than said defined level.

7. The method of claim 1, further comprising periodically updating said model portfolio.

8. The method of claim 1, further comprising periodically updating said hedging portfolio.

9. The method of claim 1, further comprising combining on a daily basis said cash flows of said model portfolio and said hedging portfolio.

10. The method of claim 1, wherein said commodity is electricity.

11. The method of claim 1, wherein said commodity is selected from the group including natural gas, copper, zinc, interest rates, oil products, bandwidth and foreign exchange.

12. A computer system for managing a first entity'"'"'s exposures to an economic risk associated with a commodity, said system comprising:

at least one programmable processor configured to;

form a model portfolio of said first entity'"'"'s exposures by a portfolio modeling engine, wherein said model portfolio generates cash flow data;

form a hedging portfolio based on at least one hedging transaction of said first entity and said model portfolio by a hedging modeling engine, wherein said hedging portfolio generates cash flow data;

receive benchmark cash flow data agreed to by said first entity and a second entity;

receive said model portfolio and said hedging portfolio and combine said cash flow data of said model portfolio and said hedging portfolio by a tracking portfolio generator, wherein said tracking portfolio generator generates combined cash flow data; and

calculate payout data based on a difference between said combined cash flow data and said benchmark cash flow data by a payout manager, wherein the payout data represents payments to be made between the first entity and the second entity;

at least an input device; and

at least an output device.

13. The system of claim 12, wherein said calculated payout data represents a payment to be provided to said first entity if said combined cash flow data is less than said benchmark cash flow data and said payout data represents is a payment to be received from said first entity if said combined cash flow data is greater than said benchmark cash flow data.

14. The system of claim 13, wherein said payment is calculated as a percentage of said difference between said combined cash flow data and said benchmark cash flow data.

15. The system of claim 13, wherein said system determines if said difference between said combined cash flow data and said benchmark cash flow data is within or outside a band and said payment is calculated based on whether said difference is within or outside the band.

16. The system of claim 13, wherein said payment is provided if said difference between said combined cash data and said benchmark cash flow data is greater than a defined level and said payment is calculated if said difference is greater than said defined level.

17. The system of claim 12, wherein said model portfolio is periodically updated.

18. The system of claim 12, wherein said hedging portfolio is periodically updated.

19. The system of claim 12, wherein said cash flow data of said model portfolio and said hedging portfolio are combined daily.

20. The system of claim 12, wherein said commodity is electricity.

21. The system of claim 12, wherein said commodity is selected from the group including natural gas, copper, zinc, interest rates, oil products, bandwidth and foreign exchange.

31. The system of claim 12, wherein said cash flow data of said model portfolio and said hedging portfolio are combined daily.

22. A computer-implemented system by which a first entity manages a portfolio of exposures to an economic risk associated with a commodity, comprising:

at least one programmable processor configured to;

execute at least one transaction between a second entity and said first entity, said at least one transaction forming a model portfolio generating cash flow data through a transaction manager;

execute at least one hedging transaction, said at least one hedging transaction forming a hedging portfolio generating cash flow data through a hedging module;

receive benchmark cash flow data agreed to by said first entity and said second entity;

receive and combine said cash flow data of said model portfolio and said hedging portfolio through a tracking portfolio generator; and

calculate payout data based on a difference between said combined cash flow data and said benchmark cash flow data through a payout manager, wherein the payout data represents payments to be made between the first entity and the second entity;

at least an input device; and

at least an output device.

23. The system of claim 22, wherein said at least one transaction is an actual transaction.

24. The system of claim 22, wherein said at least one transaction is a proxy transaction.

25. The system of claim 22, wherein said calculated payout data represents is a payment to be made to said first entity if said combined cash flow data is less than said benchmark cash flow data and said payout data represents a payment to be received from said first entity if said combined cash flow data is greater than said benchmark cash flow data.

26. The system of claim 25, wherein said payment is calculated as a percentage of said difference between said combined cash flow data and said benchmark cash flow data.

27. The system of claim 25, wherein said system determines if said difference between said combined cash flow data and said benchmark cash flow data is within or outside a band and said payment is calculated based on whether said difference is within or outside the band.

28. The system of claim 25, wherein said payment is provided if said difference between said combined cash flow data and said benchmark cash flow data is greater than a defined level and said payment is calculated if said difference is greater than said defined level.

29. The system of claim 22, wherein said model portfolio is periodically updated.

30. The system of claim 22, wherein said hedging portfolio is periodically updated.

32. The system of claim 22, wherein said at least one programmable processor is further configured to determine, through a cash flow manager, cash flows to be exchanged between said first entity and said second entity based on said combined cash flow data, whereby the second entity is able to record on its books the first entity'"'"'s portfolio of exposures, while remaining substantially risk neutral with respect to the first entity'"'"'s exposures.

33. The system of claim 32, wherein said cash flow manager determines that when said combined cash flow data is positive, then payment of such excess cash flow is to be paid by said second entity to said first entity, and when said combined cash flow data is negative, then payment of such shortfall is to be received by said second entity from said first entity.

34. The system of claim 32, wherein said cash flow manager considers that said second entity retains any loss of cash flows resulting from a default.

35. The system of claim 32, wherein said cash flow manager considers that said second entity retains at least a portion of any pooling profits.

36. The method of claim 22, wherein said commodity is electricity.

37. The method of claim 22, wherein said commodity is selected from the group including natural gas, copper, zinc, interest rates, oil products, bandwidth and foreign exchange.