Scanning based spreads using a hedge ratio non-linear optimization model

• US 7,991,671 B2
• Filed: 03/27/2008
• Issued: 08/02/2011
• Est. Priority Date: 03/27/2008
• Status: Active Grant

• Current Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Original Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Inventors: Stephen, Amy, Patel, Ketan, Hadi, Muhammed, Glinberg, Dmitriy
• Primary Examiner(s): Havan; Thu-Thao
• Assistant Examiner(s): LIU, CHIA-YI
• Application Number:
  US12/056,465
• Publication Number:
  US 20090248588A1
• Time in Patent Office: 1,223 Days
• Field of Search: 705 35- 38
• 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 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

The disclosed embodiments utilize hedge ratios to determine the optimal hedge ratio and associated scanning spread. This tells traders what ratios of the quantities of products they should have in their portfolio in order to maintain the status of the portfolios as delta neutral, i.e. be delta hedged, and receive optimal margin credits therefore.

Claims

1. A computer implemented method for identifying a portfolio having both a substantially neutral delta and optimal margin credit therefore, the computer including a processor, the method comprising:

evaluating, by the processor, a plurality of portfolios, each portfolio containing at least two products and differing from other portfolios of the plurality of portfolio based on the quantities of the at least two products contained therein, the quantities of each of the at least two products specified to achieve a delta neutral for the portfolio, each portfolio being further characterized by at least one spread between the at least two products, each of the at least one spread being associated with an implied credit and a target credit;

aggregating, by the processor, for each portfolio of the plurality of portfolios, differences between the implied credits and the target credits for each of the at least one spread; and

identifying, by the processor, an optimal portfolio as the portfolio of the plurality of portfolios whose aggregate difference indicates a greater number of the at least one spread with an implied credit within a difference to the target credit than other portfolios of the plurality of portfolios.

2. The computer implemented method of claim 1 further comprising:

for each of the at least one spread of each portfolio of the plurality of portfolios;

computing, by the processor, an implied margin requirement for the spread;

computing, by the processor, an outright margin requirement for the spread;

computing, by the processor, an implied credit rate based on the implied and outright margin requirements; and

computing, by the processor, the difference between the implied credit and the target credit based on the implied credit rate and a target credit rate for the spread.

3. The computer implemented method of claim 2, further comprising:

obtaining, by the processor, the target credit rate from an exchange, clearing organization, or combination thereof.

4. The computer implemented method of claim 2 wherein the computing of the difference between the implied credit and the target credit further comprises computing a squared difference.

5. The computer implemented method of claim 4 wherein the aggregating further comprises summing the squared differences of each spread.

6. A computer implemented system for identifying a portfolio having both a substantially neutral delta and optimal margin credit therefore, the system comprising:

a portfolio processor implemented in the computer and operative to evaluate a plurality of portfolios, each portfolio containing at least two products and differing from other portfolios of the plurality of portfolio based on the quantities of the at least two products contained therein, the quantities of each of the at least two products specified to approach a neutral delta for the portfolio, each portfolio being further characterized by at least one spread between the at least two products, each of the at least one spread being associated with an implied credit and a target credit;

the portfolio processor including;

an aggregation processor operative to aggregate, for each portfolio of the plurality of portfolios, differences between the implied credits and the target credits for each of the at least one spread; and

a portfolio identifier coupled with the aggregation processor and operative to identify an optimal portfolio as the portfolio of the plurality of portfolios whose aggregate difference indicates a greater number of the at least one spread with an implied credit within a difference to the target credit than other portfolios of the plurality of portfolios.

7. The computer implemented system of claim 6 wherein the aggregation processor is further operative, for each of the at least one spread of each portfolio of the plurality of portfolios, to compute an implied margin requirement for the spread, computing an outright margin requirement for the spread, compute an implied credit rate based on the implied and outright margin requirements, and compute the difference between the implied credit and the target credit based on the implied credit rate and a target credit rate for the spread.

8. The computer implemented system of claim 7, wherein the aggregation processor is further operative to obtain the target credit rate from an exchange, clearing organization, or combination thereof.

9. The computer implemented system of claim 7 wherein the aggregation processor is further operative to compute a squared difference between the implied credit and the target credit.

10. The s computer implemented system of claim 9 wherein the aggregation processor is further operative to sum the squared differences of each spread.