System and method of margining fixed payoff products

• US 8,086,513 B2
• Filed: 08/08/2008
• Issued: 12/27/2011
• 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): Hammond, III, Thomas M
• Application Number:
  US12/188,576
• Publication Number:
  US 20080294572A1
• Time in Patent Office: 1,236 Days
• Field of Search: None
• US Class Current: 705/36.R
• CPC Class Codes: G06Q 20/102 Bill distribution or payments
• 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 is disclosed for determining performance bonds related to fixed payoff products, i.e. contracts which payoff a fixed amount based on the outcome of an underlying event regardless of the particular value of the underlying event. The worst outcome of the overall portfolio, which may contain more than one instrument, is calculated. This permits the portfolio to have both long and short positions on the same underlying event and offsets, e.g. long (bought but not closed out) and short (sold but not closed out) positions, among instruments in the portfolio are factored in. A universe of outcomes is constructed including single events with single outcomes, and the probability thereof, an single events with multiple outcomes, each with a probability thereof. This universe is implemented in a matrix probabilities on different outcomes, also referred to as “strikes.” Each strike/outcome then has an associated price and probability, typically factored together as single value reflective of both. Events with low probability will have low values, resulting in a lower margin requirement, as will be explained below. The margin requirement/performance bond is then set equal to the amount of the maximum loss that the portfolio can sustain for any possible outcome of the underlying event, adjusted for the probability of the outcome.

Claims

1. A computer implemented method of computing a margin requirement for a portfolio, the portfolio comprising at least one product having at least one associated fixed payoff value based on at least one outcome of a finite set of outcomes of an event, the method comprising:

computing, by a processor of the computer, a portfolio value based on a product value of each of the at least one product;

determining, by the processor, for each of the at least one product, a set of non-redundant outcomes of the finite set of outcomes, the set of non-redundant outcomes not including the at least one outcome;

generating, by the processor, for each of the at least one product, a risk value for each of the at least one outcome and each non-redundant outcome of the set of non-redundant outcomes, the risk value comprising one of a gain or loss of the product value associated with the particular outcome;

adjusting, by the processor, each of the risk values based on a likelihood that the associated outcome will occur;

determining, by the processor, for each of the at least one outcome and each non-redundant outcome of the set of non-redundant outcomes, an aggregate risk value of each of the adjusted risk values generated for the particular outcome of each of the at least one product;

determining, by the processor, a maximum aggregate risk value comprising the aggregate risk value representing the largest loss from among the determined aggregate risk values; and

computing, by the processor, a margin requirement equal to the difference between the portfolio value and the maximum aggregate risk value.

2. The computer implemented method of claim 1 wherein the set of non-redundant outcomes includes those outcomes of the finite set of outcomes, the occurrence of which results in a change in the fixed payoff value from a fixed payoff value associated with another of the finite set of outcomes.

3. The computer implemented method of claim 1, wherein the computing of the product value of each of the at least one product comprises computing the price of the product multiplied by the fixed payoff value associated with the at least one outcome.

4. The computer implemented method of claim 3, further comprising expressing, by the processor, the product value as a positive number for products representing buy orders and a negative value for products representing sell orders.

5. The computer implemented method of claim 1, wherein the computing of the product value of each of the at least one product comprises computing a probability of the occurrence of the at least one outcome resulting in the fixed payoff associated with the at least one outcome multiplied by that fixed payoff.

6. The computer implemented method of claim 1, wherein the event comprises a change in numerical value, each of the at least one outcome comprising a possible resultant numerical value.

7. The computer implemented method of claim 6, wherein a first non-redundant outcome of the set of non-redundant outcomes comprises a first numerical value one increment below the lowest numerical value of the at least one outcome and a second non-redundant outcome of the set of non-redundant outcomes comprises a second numerical value one increment above the highest numerical value of the at least one outcome.

8. The computer implemented method of claim 6, wherein the fixed payoff is paid if the change in numerical value is at least one of greater than a defined criteria, less than a defined criteria, within a range of defined criteria, or combinations thereof.

9. The computer implemented method of claim 1, wherein the event comprises a binary event, the at least one outcome comprising an occurrence outcome and non-occurrence outcome of the event, the set of non-redundant outcomes comprising no other outcomes.

10. The computer implemented method of claim 1, wherein the risk value is computed as the product value minus the fixed payoff for the particular outcome.

11. A system for computing a margin requirement for a portfolio, the portfolio comprising at least one product having at least one associated fixed payoff value based on at least one outcome of a finite set of outcomes of an event, the system comprising a processor and a memory coupled therewith, the system further comprising:

a risk processor computer software program stored in the memory and executable by the processor to compute a portfolio value based on a product value of each of the at least one product;

a possible outcome generator computer software program stored in the memory and executable by the processor to determine, for each of the at least one product, a set of non-redundant outcomes of the finite set of outcomes, the set of non-redundant outcomes not including the at least one outcome;

a risk array value generator computer software program stored in the memory and coupled with the possible outcome generator computer software program and executable by the processor to generate, for each of the at least one product, a risk array defining a risk value for each of the at least one outcome and each non-redundant outcome of the set of non-redundant outcomes, the risk value comprising one of a gain or loss of the product value associated with the particular outcome;

a probability generator computer software program stored in the memory and coupled with the possible outcome generator computer software program and the risk array value generator computer software program and executable by the processor to adjust each of the risk values based on a likelihood that the associated outcome will occur;

the risk processor computer software program being coupled with the risk array generator computer software program so as to access the risk array and being further executable by the processor to determine, for each of the at least one outcome and each non-redundant outcome of the set of non-redundant outcome, an aggregate risk value of each of the adjusted risk values generated for the particular outcome of each of the at least one product;

the risk processor computer software program being further executable by the processor to determine a maximum aggregate risk value comprising the aggregate risk value representing the largest loss from among the determined aggregate risk values and compute a margin requirement equal to the difference between the portfolio value and the maximum aggregate risk value.

12. The system of claim 11 wherein the set of non-redundant outcomes includes those outcomes of the finite set of outcomes, the occurrence of which results in a change in the fixed payoff value from a fixed payoff value associated with another of the finite set of outcomes.

13. The system of claim 11, wherein the risk processor computer software program is further executable by the processor to compute the product value of each of the at least one product as the price of the product multiplied by the fixed payoff value associated with the at least one outcome.

14. The system of claim 13, wherein the risk processor computer software program is further executable by the processor to express the product value as a positive number for products representing buy orders and a negative value for products representing sell orders.

15. The system of claim 11, wherein the risk processor computer software program is further executable by the processor to compute the product value of each of the at least one product a probability of the occurrence of the one of the at least one outcome resulting in the fixed payoff associated with the at least one outcome multiplied by that fixed payoff.

16. The system of claim 11, wherein the event comprises a change in numerical value, each of the at least one outcome comprising a possible resultant numerical value.

17. The system of claim 16, wherein a first non-redundant outcome of the set of non-redundant outcomes comprises a first numerical value one increment below the lowest numerical value of the at least one outcome, a second non-redundant outcome of the set of non-redundant outcomes comprises a second numerical value one increment above the highest numerical value of the at least one outcome.

18. The system of claim 16, wherein the fixed payoff is paid if the change in numerical value is at least one of greater than a defined criteria, less than a defined criteria, within a range of defined criteria, or combinations thereof.

19. The system of claim 11, wherein the event comprises a binary event, the at least one outcome comprising an occurrence outcome and a non-occurrence outcome of the event, the set of non-redundant outcomes comprising no other outcomes.

20. The system of claim 11, wherein the discount comprises no discount.

21. The system of claim 11, wherein the adjusting further comprises computing the discount for each associated outcome.

22. The system of claim 11, wherein the adjusting further comprises computing the discount for a group of associated outcomes.

23. The system of claim 11, wherein the risk array processor computer software program is further executable by the processor to compute the risk value as the product value minus the fixed payoff for the particular outcome.