System and method for creating and trading a digital derivative investment instrument
First Claim
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1. A computer implemented method of creating a financial instrument with a processor of an exchange, the method comprising:
- establishing a plurality of credit event categories with a digital derivative contract definition module in an exchange backend system;
establishing, with a binary variable monitoring module, a digital derivative contract with a payout amount that is based on an index of a plurality of entities, wherein the digital derivative contract provides the payout amount based on;
a first settlement plan when each one of the plurality of entities in the index is associated with a credit event in the plurality of credit event categories;
a second settlement plan when none of the plurality of entities in the index is associated with a credit event in the plurality of credit event categories; and
a third settlement plan when at least one, but not all, of the plurality of entities in the index is associated with a credit event in the plurality of credit event categories.
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Abstract
An investment instrument is disclosed that allows investors to take risk positions relative to the occurrence or non-occurrence of a contingent binary event. The contingent binary event will have one of two possible outcomes. In a digital derivatives contract, a long investor agrees to pay a short investor a contract amount in return for the short investor agreeing to pay the long investor one of two different settlement amounts depending on the outcome as the contingent binary event. Typically, one settlement amount will be zero and the other will be an amount greater than the derivatives contract price.
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Citations
15 Claims
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1. A computer implemented method of creating a financial instrument with a processor of an exchange, the method comprising:
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establishing a plurality of credit event categories with a digital derivative contract definition module in an exchange backend system; establishing, with a binary variable monitoring module, a digital derivative contract with a payout amount that is based on an index of a plurality of entities, wherein the digital derivative contract provides the payout amount based on; a first settlement plan when each one of the plurality of entities in the index is associated with a credit event in the plurality of credit event categories; a second settlement plan when none of the plurality of entities in the index is associated with a credit event in the plurality of credit event categories; and a third settlement plan when at least one, but not all, of the plurality of entities in the index is associated with a credit event in the plurality of credit event categories. - View Dependent Claims (2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15)
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Specification