System and method for asymmetric offsets in a risk management system

• US 8,577,774 B2
• Filed: 07/30/2012
• Issued: 11/05/2013
• 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:
  US13/561,997
• Publication Number:
  US 20120296850A1
• Time in Patent Office: 463 Days
• Field of Search: 705 35- 45
• US Class Current: 705/36.R
• 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 for using asymmetrical offsets for products in a risk management analysis system are disclosed. Conventional systems assign symmetrical offsets for products, that is, if two products have an 80% correlation they each would be assigned an offset of 80% with respect to each other. However, it is desirable to allow for asymmetrical offsets. In the disclosed system and method, when two products have a correlation of 80%, one may be assigned an offset of 75% and the other may be assigned an offset of 80%. There are many reasons to vary the offset between the products. The varying offset may reflect an asymmetry in the risk in one of the products, such as being traded in an illiquid market or in a less desirable venue. The varying offset may correct for an imbalance in spread credits due to special charges from intra spreading.

Claims

1. A computer implemented method of analyzing risk, the method comprising:

adjusting, by a computer, a first margin requirement for a first product with respect to a second margin requirement for a second product having a correlation with the first product, as a function of a risk of loss associated with the first product as compared to the second product irrespective of the correlation;

adjusting, by the computer, a third margin requirement for a third product with respect to a fourth margin requirement for a fourth product having a correlation with the third product, wherein the adjustment to the third margin requirement is the same as the adjustment to the fourth margin requirement; and

computing, by the computer, a margin for a portfolio comprising the first, second, third and fourth products as a sum of the first, second, third and fourth margin requirements.

2. The computer implemented method of claim 1, wherein the risk of loss associated with the first product is asymmetric as compared to the risk of loss of the second product and a risk of loss associated with the third product is symmetric with a risk of loss associated with the fourth product.

3. The computer implemented method of claim 1, wherein the first product is traded in a market having less liquidity than a market for the second product and the third product is traded in a market having the same liquidity as a market for the fourth product.

4. The computer implemented method of claim 1, wherein the first and second products form one of a calendar or butterfly spread.

5. A computer implemented method of analyzing risk, the method comprising:

receiving, at a computer, data indicative of a first margin requirement for a first tradable instrument, data indicative of a first risk of loss associated with the first tradable instrument, data indicative of a second margin requirement for a second tradable instrument and data indicative of a second risk of loss associated with the second tradable instrument;

adjusting, in the computer, a first margin requirement for a first tradable instrument with respect to a second margin requirement for a second tradable instrument having a correlation with the first tradable instrument, as a function of a risk of loss associated with the first tradable instrument as compared to the second tradable instrument irrespective of the correlation;

adjusting, in a computer, a third margin requirement for a third tradable instrument with respect to a fourth margin requirement for a fourth tradable instrument having a correlation with the third tradable instrument, wherein the adjustment to the third margin requirement approximates the adjustment to the fourth margin requirement; and

computing, by the computer, a margin for a portfolio comprising the first, second, third and fourth tradable instruments as a sum of the first, second, third and fourth margin requirements.

6. The computer implemented method of claim 5, wherein the first risk of loss associated with the first tradable instrument is asymmetric as compared to the second risk of loss of the second tradable instrument and a third risk of loss associated with the third tradable instrument is symmetric with a fourth risk of loss associated with the fourth tradable instrument.

7. The computer implemented method of claim 5, wherein the first tradable instrument is traded in a market having less liquidity than a market for the second tradable instrument and the third tradable instrument is traded in a market having a same liquidity as a market for the fourth tradable instrument.

8. The computer implemented method of claim 5, wherein the adjusted first margin requirement is greater than the adjusted second margin requirement when the first risk of loss is greater than the second risk of loss or the adjusted second margin requirement is greater than the adjusted first margin requirement when the second risk of loss is greater than the first risk of loss.

9. The computer implemented method of claim 6, wherein the first and second tradable instruments form one of a calendar spread or a butterfly spread.

10. A method comprising:

adjusting, at a computer processor, a first margin requirement for a first tradable instrument with respect to a second margin requirement for a second tradable instrument having a correlation with the first tradable instrument, as a function of a risk of loss associated with the first tradable instrument as compared to a risk of loss associated with the second tradable instrument;

adjusting, at the computer processor, a third margin requirement for a third tradable instrument with respect to a fourth margin requirement for a fourth tradable instrument having a correlation with the third tradable instrument; and

computing, by the computer processor, a margin for a portfolio comprising the first, second, third and fourth tradable instruments as a sum of the first, second, third and fourth margin requirements.

11. The method of claim 10, wherein the risk of loss associated with the first tradable instrument is asymmetric as compared to the risk of loss of the second tradable instrument or a risk of loss associated with the third tradable instrument is asymmetric with a risk of loss associated with the fourth tradable instrument.

12. The method of claim 11, further comprising:

assigning a first offset to the first tradable instrument; and

assigning a second offset to the second tradable instrument, wherein the first offset is different than the second offset.

13. The method of claim 12, wherein a difference between the first offset and the second offset reflects an asymmetry in risk.

14. The method of claim 12, wherein a difference between the first offset and the second offset reflects an illiquid market for the first tradable instrument or the second tradable instrument.

15. The method of claim 12, wherein a difference between the first offset and the second offset reflects a desirability of a venue associated with the first tradable instrument or the second tradable instrument.

16. The method of claim 10, wherein the first tradable instrument is an option on a combination product.

17. The method of claim 16, wherein the combination product is a butterfly spread or a calendar spread.

18. The method of claim 16, wherein the combination product is a user defined spread comprising legs selected individually by a user.

19. The method of claim 10, further comprising:

separating the first tradable instrument as a first commodity at a first month and a second commodity at a second month.

20. The method of claim 19, further comprising:

calculating a first credit rate for the first commodity and a second credit rate for the second commodity, wherein the first credit rate exceeds the second credit rate.