Reduction of financial instrument volatility

• US 7,970,681 B1
• Filed: 11/28/2000
• Issued: 06/28/2011
• Est. Priority Date: 04/10/2000
• Status: Active Grant

• Current Assignee: Goldman Sachs & Co. LLC (Goldman Sachs Group Incorporated)
• Original Assignee: Goldman Sachs & Company (Goldman Sachs Group Incorporated)
• Inventors: Bridges, Tim, Evans, Mark, Frankel, Oliver
• Primary Examiner(s): Weisberger, Richard C
• Application Number:
  US09/723,694
• Time in Patent Office: 3,864 Days
• Field of Search: 705/31, 705 35- 45
• US Class Current: 705/36.00R
• CPC Class Codes: G06Q 40/02 Banking, e.g. interest calculation or account maintenance credit or loans G06Q40/03
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

An earnings volatility reduction procedure includes determining a first sensitivity value of a portfolio to underlying market conditions, trading in an immunizing instrument having a second sensitivity value substantially equal in magnitude and opposite in value of the first sensitivity value, and trading in a qualifying instrument having a third sensitivity value substantially equal to the first sensitivity value. A derivative portfolio (in particular, one that includes a financial instrument for which changes in value are characterized as earnings pursuant to FAS 133) is structured by determining a sensitivity of the derivative portfolio with respect to financial conditions in a trading market, executing an immunizing purchase of a second trading instrument in an amount equal to the magnitude of the current sensitivity and opposite in value, and executing a qualifying sale of a third trading instrument in an amount equal to amount of the current sensitivity.

Claims

1. A computer system comprising:

a processor coupled to a memory comprising instructions to configure the processor to;

determine a first sensitivity value of a portfolio to underlying market conditions;

determine an immunizing instrument based on a stored database of accounting rules characterizing changes in value of the immunizing instrument as subject to accounting as earnings;

execute a trade in the immunizing instrument having a second sensitivity value substantially equal in magnitude and opposite in value of the first sensitivity value;

determine a qualifying instrument based on the stored database of accounting rules characterizing changes in value of the qualifying instrument as subject to accountings as other comprehensive income (OCI); and

execute a trade of the qualifying instrument having a third sensitivity value substantially equal to the first sensitivity value, thereby reducing earnings volatility in a derivative account, wherein a change in mark-to-market value of the derivative account is accounted for through quarterly earnings.

2. The system of claim 1 wherein the underlying market conditions comprise price and rate conditions.

3. The system of claim 1 wherein where the first, second and the third sensitivity values comprise notational amount values.

4. The system of claim 1 wherein where the first, second and the third sensitivity values each comprise composite values and each of said sensitivity values is based on different plurality of financial instruments.

5. The system of claim 1 wherein at least one of the sensitivity values is expressed as a schedule of forward notional amounts.

6. The system of claim 1 wherein the instructions to trade in the immunizing instrument comprise instructions to transact an at-the-market purchase establishing a long position in a first trading instrument.

7. The system of claim 6 wherein the instructions to trade in the qualifying instrument comprise instructions to transact an at-the-market fixed price sale establishing a short position in a second trading instrument.

8. The system of claim 7 wherein the first trading instrument comprises a plurality of different constituent financial instruments.

9. The system of claim 1 wherein the portfolio, the immunizing instrument, and the qualifying instrument are related to a same commodity.

10. A processor-implemented method for reducing earnings volatility in a derivative account, comprising:

determining a first sensitivity value of a portfolio to underlying market conditions;

determining by a processor an immunizing instrument based on a stored database of accounting rules characterizing changes in value of the immunizing instrument as subject to accounting as earnings;

executing a trade in the immunizing instrument having a second sensitivity value substantially equal in magnitude and opposite in value of the first sensitivity value;

determining by a processor a qualifying instrument based on the stored database of accounting rules accounting rules characterizing changes in value of the qualifying instrument as subject to accountings as other comprehensive income (OCI); and

executing a trade of the qualifying instrument having a third sensitivity value substantially equal to the first sensitivity value, thereby reducing earnings volatility in a derivative account, wherein a change in mark-to-market value of the derivative account is accounted for through quarterly earnings.

11. The method of claim 10 wherein the underlying market conditions comprise price and rate conditions.

12. The method of claim 10 wherein where the first, second and the third sensitivity values comprise notational amount values.

13. The method of claim 10 wherein where the first, second and the third sensitivity values each comprise composite values and each of said sensitivity values is based on different plurality of financial instruments.

14. The method of claim 10 wherein at least one of the sensitivity values is expressed as a schedule of forward notional amounts.

15. The method of claim 10 wherein the instructions to trade in the immunizing instrument comprise instructions to transact an at-the-market purchase establishing a long position in a first trading instrument.

16. The method of claim 15 wherein the instructions to trade in the qualifying instrument comprise instructions to transact an at-the-market fixed price sale establishing a short position in a second trading instrument.

17. The method of claim 15 wherein the first trading instrument comprises a plurality of different constituent financial instruments.

18. The method of claim 10 wherein the portfolio, the immunizing instrument, and the qualifying instrument are related to a same commodity.