Methods, systems and computer program products to facilitate the pricing, risk management and trading of derivatives contracts

• US 7,933,824 B2
• Filed: 06/18/2003
• Issued: 04/26/2011
• Est. Priority Date: 06/18/2002
• Status: Expired due to Fees

• Current Assignee: Philibert F. Kongtcheu
• Original Assignee: Philibert F. Kongtcheu
• Inventors: Kongtcheu, Phil
• Primary Examiner(s): Patel; Jagdish N
• Assistant Examiner(s): CHANDLER, SARA M
• Application Number:
  US10/518,823
• Publication Number:
  US 20070162373A1
• Time in Patent Office: 2,869 Days
• Field of Search: 705/35, 705/36.R, 705/37
• US Class Current: 705/36.00R
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/02 Banking, e.g. interest calculation or account maintenance credit or loans G06Q40/03
• 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

This invention relates to methods, systems and computer program products to facilitate the pricing trading and risk management of derivatives contracts on one or more underlying via the introduction of Basis instrument Contracts (BICs). Such pricing trading and risk management may be done in organized exchanges or in over-the-counter (OTC) markets.

Claims

1. A method for yielding a premium payment amount of a derivative contract along a multi-period timeline comprising:

a) receiving, via a first input device linked to a computer processor, a request from a user for a premium payment amount of a derivative contract, said derivative contract having a description comprising, on the multi-period timeline, a contract agreement time, a premium payment time and a payout payment time and, said description further comprising a payout payment amount described as a function of realized values of specified underlying(s) or parameters between the premium payment time and the payout payment time;

b) receiving, via a second input device linked to the computer processor, a premium payment amount for each marginal unit of basis instruments contracts (BICs) having the same payout payment time as the derivative contract, each said marginal unit of BICs having the same premium payment time, said premium payment time being a time that precedes the payout payment time of the derivatives contract on the multi-period timeline;

c) decomposing, by the computer processor, the derivative contract into a portfolio of composing BICs, wherein each composing BIC comprises a quantity of marginal units of BICs having the same payout payment time as the derivative contract;

d) computing, by the computer processor, a premium payment amount for each composing BIC based on a sum of the marginal units of BICs premium payment amounts in the quantity given by the portfolio decomposition;

e) computing, by the computer processor, a premium payment amount of the derivatives contract based on the portfolio of composing BICs having the same payout payment time as the derivatives contract, wherein said premium payment amount of the derivatives contract is computed as a weighted sum of the premium payment amounts of the composing BICs in the portfolio based on the quantities given by the portfolio decomposition,

f) yielding, by the computer processor, the premium payment amount of the derivatives contract for the premium payment time of the marginal units of BICs;

g) repeating steps a), b), c), d), e) and f), where the premium payment amount of the derivative contract for the premium payment time of the marginal units of BICs is received by the first input device as a new derivatives contract with an incrementally decreased payout payment time, and wherein said repetition terminates when the premium payment time in step f) coincides with the premium payment time specified by the user in the description for the derivative contract;

h) and transmitting, via an output device linked to the computer processor, the premium payment amount for the derivative contract yielded in step f) when step

g) indicates the repetition terminates, to the user who requested the premium payment amount of the derivative contract.

2. The method of claim 1, where the BICs are supplied in a variety of payout payment formats, including the Options format, the extended Arrow Debreu format and the Fourier format.

3. The method of claim 1 used in a trading or exchange system, wherein step b) includes receiving a computed marginal premium payment amount for each unit or group of composing BICs obtained by selecting the most competitive price among those quoted by one or more market makers.

4. The method of claim 3, where the selected most competitive prices are subsequently contracted upon confirmation of a user'"'"'s intent to trade the original derivatives contract.

5. The method of claim 1, wherein the premium payment amount for the marginal units of BICs received from the second input device is provided in aggregate or compressed form to reduce complexity or computing time.

6. The method of claim 1, wherein the premium payment amount transmitted via the output device is increased by an optional service margin.

7. A system for yielding a premium payment amount of a derivative contract along a multi-period timeline comprising:

a) a first input device configured to receive a request from a user for a premium payment amount of a derivative contract, said derivative contract having a description comprising, on the multi-period timeline, a contract agreement time, a premium payment time and a payout payment time and, said description further comprising a payout payment amount described as a function of realized values of specified underlying(s) or parameters between the premium payment time and the payout payment time;

b) a second input device configured to receive a premium payment amount for each marginal unit of basis instruments contracts (BICs) having the same payout payment time as the derivative contract, each said marginal unit of BICs having the same premium payment time, said premium payment time being a time that precedes the payout payment time of the derivatives contract on the multi-period timeline;

c) a computer processor linked to the first input device configured to decompose the derivative contract into a portfolio of composing BICs, wherein each composing BIC comprises a quantity of marginal units of BICs having the same payout payment time as the derivative contract;

a computer processor linked to the first input device and the second input device configured to;

d) compute a premium payment amount for each composing BIC based on a sum of the marginal units of BICs premium payment amounts in the quantity given by the portfolio decomposition;

e) compute a premium payment amount of the derivatives contract based on the portfolio of composing BICs having the same payout payment time as the derivatives contract, wherein said premium payment amount of the derivatives contract is computed as a weighted sum of the premium payment amounts of the composing BICs in the portfolio based on the quantities given by the portfolio decomposition,

f) yield the premium payment amount of the derivatives contract for the premium payment time of the marginal units of BICs;

g) repeat steps a), b), c), d), e) and f), where the premium payment amount of the derivative contract for the premium payment time of the marginal units of BICs is received by the first input device as a new derivatives contract with an incrementally decreased payout payment time, and wherein said repetition terminates when the premium payment time in step f) coincides with the premium payment time specified by the user in the description for the derivative contract;

h) and an output device linked to the computer processor configured to transmit the premium payment amount for the derivative contract yielded in step f) when step g) indicates the repetition terminates, to the user who requested the premium payment amount of the derivative contract.

8. The system of claim 7, where the BICs are supplied in a variety of payout payment formats, including the Options format, the extended Arrow Debreu format and the Fourier format.

9. The system of claim 7 used in a trading or exchange system, wherein step b) further configured to receive a computed marginal premium payment amount for each unit or group of composing BICs obtained by selecting the most competitive price among those quoted by one or more market makers.

10. The system of claim 9, where the selected most competitive prices are subsequently contracted upon confirmation of a user'"'"'s intent to trade the original derivatives contract.

11. The system of claim 7, wherein the premium payment amount for the marginal units of BICs received from the second input device is provided in aggregate or compressed form to reduce complexity or computing time.

12. The system of claim 7, wherein the premium payment amount transmitted via the output device is increased by an optional service margin.

13. A computer program product for yielding a premium payment amount of a derivative contract along a multi-period timeline comprising computer readable memory having logic stored therein for execution on a computer, said logic comprising:

a) logic to receive a request from a user for a premium payment amount of a derivative contract, said derivative contract having a description comprising, on the multi-period timeline, a contract agreement time, a premium payment time and a payout payment time and, said description further comprising a payout payment amount described as a function of realized values of specified underlying(s) or parameters between the premium payment time and the payout payment time;

b) logic to receive a premium payment amount for each marginal unit of basis instruments contracts (BICs) having the same payout payment time as the derivative contract, each said marginal unit of BICs having the same premium payment time, said premium payment time being a time that precedes the payout payment time of the derivatives contract on the multi-period timeline;

c) logic to decompose the derivative contract into a portfolio of composing BICs, wherein each composing BIC comprises a quantity of marginal units of BICs having the same payout payment time as the derivative contract;

d) logic to compute a premium payment amount for each composing BIC based on a sum of the marginal units of BICs premium payment amounts in the quantity given by the portfolio decomposition;

e) logic to compute a premium payment amount of the derivatives contract based on the portfolio of composing BICs having the same payout payment time as the derivatives contract, wherein said premium payment amount of the derivatives contract is computed as a weighted sum of the premium payment amounts of the composing BICs in the portfolio based on the quantities given by the portfolio decomposition,

f) logic to yield the premium payment amount of the derivatives contract for the premium payment time of the marginal units of BICs;

g) logic to repeat steps a), b), c), d), e) and f), where the premium payment amount of the derivative contract for the premium payment time of the marginal units of BICs is received by the first input device as a new derivatives contract with an incrementally decreased payout payment time, and wherein said repetition terminates when the premium payment time in step f) coincides with the premium payment time specified by the user in the description for the derivative contract;

h) and logic to transmit the premium payment amount for the derivative contract yielded in step f) when step g) indicates the repetition terminates, to the user who requested the premium payment amount of the derivative contract.

14. The computer program product of claim 13, where the BICs are supplied in a variety of payout payment formats, including the Options format, the extended Arrow Debreu format and the Fourier format.

15. The computer program product of claim 13 used in a trading or exchange system, wherein limitation b) further includes logic to receive a computed marginal premium payment amount for each unit or group of composing BICs obtained by selecting the most competitive price among those quoted by one or more market makers.

16. The computer program product of claim 15, where the selected most competitive prices are subsequently contracted upon confirmation of a user'"'"'s intent to trade the original derivatives contract.

17. The computer program product of claim 13, wherein the premium payment amount for the marginal units of BICs received from the second input device is provided in aggregate or compressed form to reduce complexity or computing time.

18. The computer program product of claim 13, wherein the premium payment amount transmitted via the output device is increased by an optional service margin.