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

• US 8,224,730 B2
• Filed: 06/15/2011
• Issued: 07/17/2012
• 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: Hadi, Muhammed, Stephen, Amy, Patel, Ketan, Glinberg, Dmitriy
• Primary Examiner(s): Kyle, Charles
• Assistant Examiner(s): Liu, Jennifer
• Application Number:
  US13/160,817
• Publication Number:
  US 20110246394A1
• Time in Patent Office: 398 Days
• Field of Search: 705 35- 36
• US Class Current: 705/35
• 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 of computing quantities of each of a plurality of derivative products to include in a portfolio, each of the plurality of derivative products being characterized by a product position based on underlying product and a product delta representative of a sensitivity of the product position to change in price of the underlying product, the portfolio being characterized by a portfolio delta representative of a net sum of the product delta of each of the plurality of derivative products included in the portfolio, the quantities being computed so as to optimize credit towards a margin requirement for the portfolio while maintaining the portfolio delta of the portfolio substantially close to zero, the computer including a processor, the method comprising:

for at least one derivative product of the plurality of derivative products, identifying, by the processor, an exemplary set of first quantities of the at least one derivative product and for each first quantity of the at least one derivative product of the set of first quantities;

computing, by the processor, second quantities of each of the other of the plurality of derivative products such that the product delta of the second quantity of each of the other of the plurality of derivative products offsets the product delta associated with the first quantity of the at least one derivative product; and

for each spread combination of the first and second quantities of the at least one derivative product and the other of the plurality of products;

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

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

computing, by the processor, an implied credit rate for the spread combination based on both the implied margin and the outright margin for the spread combination;

computing, by the processor, a difference between the implied credit rate and a target credit rate for the spread combination;

generating, by the processor, a sum of each computed difference for each spread combination of the selected quantity of the at least one derivative product; and

wherein the method further includes;

identifying, by the processor, a target quantity, of the at least one derivative product of the set of quantities, having the lowest summed computed difference, the target quantity of the at least one derivative product, in conjunction with quantities of the other of the plurality of derivative products computed to offset the product delta associated with the target quantity of the at least one derivative product, representing a portfolio having maximum credit towards a margin requirement for the portfolio while maintaining the portfolio delta of the portfolio at or within a difference of zero.

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

for a single quantity of each selected derivative product of the plurality of derivative products, determining, by the processor, a quantity of at least one other derivative product of the plurality of derivative products such that the product delta of the quantity of the other derivative product offsets the product delta associated with the single quantity of the selected derivative product.

3. The computer implemented method of claim 2 wherein the determining is based on market data.

4. The computer implemented method of claim 2 wherein the determining further comprises computing, by the processor, the quantity of the at least one other derivative product.

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

obtaining, by the processor, an outright margin requirement for each derivative product of the spread combination; and

obtaining, by the processor, the target credit rate for the spread combination.

6. The computer implemented method of claim 5 wherein the outright margin requirements and the target rate are obtained from an exchange, a clearing organization or a combination thereof.

7. The computer implemented method of claim 5 wherein the computing of the implied margin further comprises computing, by the processor, the implied margin based on the outright margin requirement for the quantity of each derivative product and the target credit rate.

8. The computer implemented method of claim 1 wherein the computing of the outright margin further comprises computing, by the processor, the outright margin based on the outright margin requirements for the quantity of each derivative product of the spread combination.

9. The computer implemented method of claim 1 wherein the computing of the difference between the implied credit rate and the target credit rate further comprises computing, by the processor, a squared difference, the sum being generated as a sum of the squared differences of each spread combination.

10. A system for computing quantities of each of a plurality of derivative products to include in a portfolio, each of the plurality of derivative products being characterized by a product position based on an underlying product and a product delta representative of a sensitivity of the product position to change in price of the underlying product, the portfolio being characterized by a portfolio delta representative of a net sum of the product delta of each of the plurality of derivative products included in the portfolio, the quantities being computed so as to optimize credit towards a margin requirement for the portfolio while maintaining the portfolio delta of the portfolio substantially close to zero, the system comprising a computer having a processor and a memory coupled therewith, the memory having computer readable instructions stored therein and executable by the processor, the computer readable instructions comprising:

computer readable instructions configured to cause the processor to, for at least one derivative product of the plurality of products, identify an exemplary set of first quantities of the at least one derivative product and for each first quantity of the at least one derivative product of the set of first quantities;

compute second quantities of each of the other of the plurality of derivative products such that the product delta of the second quantity of each of the other of the plurality of derivative products offsets the product delta associated with the first quantity of the at least one derivative product; and

for each spread combination of the first and second quantities of the at least one derivative product and the other of the plurality of derivative products;

compute an implied margin for the spread combination;

compute an outright margin for the spread combination;

compute an implied credit rate for the spread combination based on both the implied margin and the outright margin for the spread combination;

compute a difference between the implied credit rate and a target credit rate for the spread combination;

generate a sum of each computed difference for each spread combination of the selected quantity of the at least one derivative product; and

wherein the portfolio processor is further operative to identify a target quantity, of the at least one derivative product of the set of quantities, having the lowest summed computed difference, the target quantity of the at least one derivative product, in conjunction with quantities of the other of the plurality of derivative product computed to offset the product delta associated with the target quantity of the at least one derivative product, representing a portfolio having maximum credit towards a margin requirement for the portfolio while maintaining the portfolio delta of the portfolio at or within a difference of zero.

11. The system of claim 10 wherein the computer readable instructions are further configured to cause the processor to, for a single quantity of each selected product of the plurality of derivative products, determine a quantity of at least one other derivative product of the plurality of derivative products such that the product delta of the quantity of the other derivative product offsets the product delta associated with the single quantity of the selected derivative product.

12. The system of claim 11 wherein the determination is based on market data.

13. The system of claim 11 wherein the computer readable instructions are further configured to cause the processor to compute the quantity of the at least one other derivative product.

14. The system of claim 10 the computer readable instructions are further configured to cause the processor to obtain an outright margin requirement for each derivative product of the spread combination and obtain the target credit rate for the spread combination.

15. The system of claim 14 wherein the outright margin requirements and the target rate are obtained from an exchange, a clearing organization or a combination thereof.

16. The system of claim 14 wherein the computer readable instructions are further configured to cause the processor to compute the implied margin based on the outright margin requirement for the quantity of each derivative product and the target credit rate.

17. The system of claim 10 wherein the computer readable instructions are further configured to cause the processor to compute the outright margin based on the outright margin requirements for the quantity of each derivative product of the spread combination.

18. The system of claim 10 wherein the computer readable instructions are further configured to cause the processor to compute the difference between the implied credit rate and the target credit rate, compute a squared difference, the sum being generated as a sum of the squared differences of each spread combination.