Patent Application
20170243261
Embodiments of the present invention relate to systems and methods for pricing of financial instruments. More particularly, the invention provides efficient systems and methods that determine prices of futures, spreads and swaps while considering product interdependencies.
Exchanges and other entities utilize computer systems to perform functions such as calculating values and prices for financial instruments, determining portfolio risks and determining initial and maintenance margin account requirements. Financial instruments can include futures, options, spreads, swaps and other combinations of financial instruments.
A futures or futures contract is a contract to buy or sell a particular commodity or financial instrument at a pre-determined price in the future. Futures contracts generally detail the quality and quantity of the underlying asset. They are generally standardized to facilitate trading on an exchange. Some futures contracts call for physical delivery while others call for cash settlement.
Options or options contracts may be used to hedge risks by allowing parties to agree on a sale price for a sale that will take place at a later time. One type of option is a call option. A call option gives the purchaser of the option the right, but not the obligation, to buy a particular asset at a later time at a guaranteed price. The guaranteed price is sometimes referred to as the strike or exercise price. Another type of option is a put option. A put option gives the purchaser of the option the right, but not the obligation, to sell a particular asset at a later time at the strike price. In either instance, the seller of the call or put option is obligated to perform the associated transactions if the purchaser chooses to exercise its option.
A swap is an agreement that a floating price is an average based on an underlying commodity future over a specific period. Most swaps include cash flows based on a notional amount. Each of the cash flows comprise a leg of the swap. An example of a swap includes a plain fixed-to-floating, or “vanilla,” interest rate swap. The vanilla swap includes an exchange of interest streams where one stream is based on a floating rate and the other interest stream is based on a fixed rate. In a vanilla swap, one party makes periodic interest payments to the other based on a variable interest rate. The variable rate may be linked to a periodically known or agreed upon rate for the term of the swap such as the London Interbank Offered Rate (LIBOR). Credit default swaps are also commonly traded financial instruments.
A composite or compo swap is an agreement that a floating price as an average based on an underlying commodity future with price converted from its currency to a different currency denominated for swap. For example, a leg linked to the performance of a stock or an equity basket/index may be settled in a first currency, while another leg, such as a financing leg, might be settled in a second currency. For instance, a composite swap may entail the receipt of an equity return denominated in dollar and the payment of financing leg denominated in Euro.
A spread product or position is a financial instrument where the price is a difference of leg 1 underlying price and leg 2 underlying price and may include two or more options, futures or other financial instruments. Spread products allow traders to profit through a change in the relative price relationships. Calendar spreads are examples of spread products. A calendar spread price is computed as the difference of an average of leg 1 underlying price and leg 2 underlying price. An example of a calendar spread includes buying an option to expire in October and selling an option on the same underlying asset expiring six months earlier.
Clearinghouses are structured to provide exchanges and other trading entities with solid financial footing. Maintaining proper margin amounts is an important part of maintaining solid financial footing. The required margin amount generally varies according to the volatility of a financial instrument; the more volatility, the larger the required margin amount. This is to ensure that the bond will cover maximum losses that a contract would likely incur over a given time period, such as a single day. Required margin amounts may be reduced where traders hold opposite positions in closely correlated markets or spread trades.
Exchanges and other entities utilize computer systems to perform functions such as calculating values and prices, determining portfolio risks and determining initial and maintenance margin account requirements. It is common for an exchange or other entity to utilize multiple computer systems to process data multiple times and with different computer devices. As the numbers of accounts and transactions increase, it becomes inefficient for exchanges and other entities to process data multiple times to determine values that may be related. In the trading environment the speed with which information can be determined and distributed to market participants can be critical. For example, regulations set time limits for clearing entities to provide margin requirements to market participants after the end of a trading day. Some market participants also expect clearing entities to quickly determine how a potential transaction will impact their margin.
Therefore there is a need in the art for more efficient computer systems and computer-implemented methods for calculating values and prices, determining portfolio risks and determining initial and maintenance margin account requirements.
Embodiments of the present invention provide efficient computer systems and computer-implemented methods for determining prices of futures, spreads and swaps by considering product interdependencies. Some embodiments use interpolation, extrapolation and backward propagation to produce accurate results.
In various embodiments, the present invention can be partially or wholly implemented on a computer-readable medium, for example, by storing computer-executable instructions or modules, or by utilizing computer-readable data structures.
Of course, the methods and systems disclosed herein may also include other additional elements, steps, computer-executable instructions, or computer-readable data structures. The details of these and other embodiments of the present invention are set forth in the accompanying drawings and the description below. Other features and advantages of the invention will be apparent from the description and drawings, and from the claims.
The present invention may take physical form in certain parts and steps, embodiments of which will be described in detail in the following description and illustrated in the accompanying drawings that form a part hereof, wherein:
Aspects of the present invention may be implemented with computer devices and computer networks that allow users to exchange trading information. An exemplary trading network environment for implementing trading systems and methods is shown in
An exchange computer system 100 receives orders and transmits market data related to orders and trades to users. Exchange computer system 100 may be implemented with one or more mainframe, desktop or other computers. A user database 102 includes information identifying traders and other users of exchange computer system 100. Data may include user names and passwords. An account data module 104 may process account information that may be used during trades. A match engine module 106 is included to match bid and offer prices. Match engine module 106 may be implemented with software that executes one or more algorithms for matching bids and offers. A trade database 108 may be included to store information identifying trades and descriptions of trades. In particular, a trade database may store information identifying the time that a trade took place and the contract price. An order book module 110 may be included to compute or otherwise determine current bid and offer prices. A market data module 112 may be included to collect market data and prepare the data for transmission to users. A risk management module 134 may be included to compute and determine a user's risk utilization in relation to the user's defined risk thresholds. An order processing module 136 may be included to decompose delta based and bulk order types for processing by order book module 110 and match engine module 106.
The trading network environment shown in
Computer device 114 is shown directly connected to exchange computer system 100. Exchange computer system 100 and computer device 114 may be connected via a T1 line, a common local area network (LAN) or other mechanism for connecting computer devices. Computer device 114 is shown connected to a radio 132. The user of radio 132 may be a trader or exchange employee. The radio user may transmit orders or other information to a user of computer device 114. The user of computer device 114 may then transmit the trade or other information to exchange computer system 100.
Computer devices 116 and 118 are coupled to a LAN 124. LAN 124 may have one or more of the well-known LAN topologies and may use a variety of different protocols, such as Ethernet. Computers 116 and 118 may communicate with each other and other computers and devices connected to LAN 124. Computers and other devices may be connected to LAN 124 via twisted pair wires, coaxial cable, fiber optics or other media. Alternatively, a wireless personal digital assistant device (PDA) 122 may communicate with LAN 124 or the Internet 126 via radio waves. PDA 122 may also communicate with exchange computer system 100 via a conventional wireless hub 128. As used herein, a PDA includes mobile telephones and other wireless devices that communicate with a network via radio waves.
One or more market makers 130 may maintain a market by providing constant bid and offer prices for a derivative or security to exchange computer system 100. Exchange computer system 100 may also exchange information with other trade engines, such as trade engine 138. One skilled in the art will appreciate that numerous additional computers and systems may be coupled to exchange computer system 100. Such computers and systems may include clearing, regulatory and fee systems.
The operations of computer devices and systems shown in
Of course, numerous additional servers, computers, handheld devices, personal digital assistants, telephones and other devices may also be connected to exchange computer system 100. Moreover, one skilled in the art will appreciate that the topology shown in
In one alternative embodiment, a clearinghouse computer or computer system may be included. A clearinghouse or other entity that clears trades may use a clearinghouse computer or computer system to accurately calculate swaption settlement prices, values, risk and margin requirements.
Various embodiments of the invention use computer systems to perform functions such as calculating values and prices for financial instruments, determining portfolio risks and determining initial and maintenance margin account requirements. The financial instruments involved include futures, options, spreads, swaps and other combinations of financial instruments. As part of the process of validating data that is determined, historical data is analyzed to determine product interdependencies.
Processor 202 may be connected to a computer-readable medium 208. Computer-readable medium 208 may be implemented with a solid state memory, physical memory or some other memory device. Computer-readable memory 208 may store computer-executable instructions for controlling the operation of processor 202. For example, computer-readable memory 208 may include computer-executable instructions 210 for causing processor 202 to analyze financial instrument data received from financial instrument database 206 to generate interdependency data 216. Computer-readable memory 208 may also include computer-executable instructions 212 for causing processor 202 to determine values such as prices, risk parameters and margin requirements. Processor 202 may use computer-executable instructions 212 to generate determined values 218. Computer-readable memory 208 may include computer-executable instructions 214 for causing processor 202 to validate determined values 218 to generate validated values 220. Examples of processes used to validate data are described below.
Validated values 220 may be transmitted to a variety of other computer systems. For example, validated values 220 may be sent to trader computer systems 222 and 224. Trader computer systems 222 and 224 may use the validated values 220 to make trading decisions. Validated values 220 may also be used by a clearinghouse computer system 226 to determine margin account requirements. One or more exchange computer systems, such as exchange computer system 228 or exchange computer system 100 (shown in
Next, the attributes of the financial instruments are analyzed in step 304 to determine interdependencies between the financial instruments.
In step 306 a settlement value for a financial instrument is determined. Step 306 may include using a conventional process to determine a settlement value. Alternative embodiments of the invention may include determining additional and/or alternative values such as other prices, risk parameters or other values generally used in trading environments.
Historical trade data may be retrieved from a historical trade database or other source in step 308. Next, in step 310 an attempt is made to validate the settlement value, or other value(s), determined in step 306 with the historical trade data and the determined interdependencies between the financial instruments. Step 310 may include determining if the settlement value or other value(s) are consistent with determined interdependencies between the financial instruments.
In step 312 it is determined whether the settlement value or other value(s) are validated. If there is no validation, in step 314 the settlement value of the financial instrument or other value(s) are modified so that they are validated. After the settlement value or other value(s) are validated, in step 316, the validated values may be transmitted to another computer system, such as a clearinghouse computer system.
Aspects of the invention may also be used to extrapolate a seasonal product forward curve.
If it is determined in step 808 that the missing or incorrect price is a local extrema, a local extrema interpolation may be performed beginning in step 810. In step 810, a local extrema from the previous seasonal cycle is identified. Step 810 may include analyzing historical data. Next, in step 812, the neighboring two points of the local extrema are identified. In step 814, the absolute difference of the neighboring points to the extrema is commuted and the smaller value is used as delta. Finally, in step 816 the delta is added to the neighboring point corresponds to the missing or incorrect extrema.
If it is determined in step 808 that the missing or incorrect price is not a local extrema, a regular interpolation may be performed beginning in step 818. In step 818 a moving average with 12 points is computed as a backbone. In other embodiments, fewer or more than 12 points may be used to compute a backbone. Next, in step 820 the backbone may be interpolated or extrapolated to cover end points and missing or incorrect prices. In some embodiments liner interpolation is used. In step 822, a difference of price to backbone may be computed as a shape. Next, in step 824 for the missing or incorrect values and neighboring points where missing or incorrect values are observed, the shape value is assigned to be the same as that of the previous seasonal cycle. A residual value (delta) is computed as a neighboring price less the sum of its shape and backbone in step 826. In step 828, interpolation of deltas from neighboring points to the missing or incorrect value may be used and added to the shape and backbone of the missing value.
Those skilled in the art will appreciate that interdependencies between other financial instruments may also be determined by analyzing attributes included in term sheets or other sources. Various algorithms may also be used to identify interdependencies between financial instruments.
The disclosed computer systems, such as exchange computer 100 and the computer system shown in
The present invention has been described herein with reference to specific exemplary embodiments thereof. It will be apparent to those skilled in the art that a person understanding this invention may conceive of changes or other embodiments or variations, which utilize the principles of this invention without departing from the broader spirit and scope of the invention as set forth in the appended claims. For example, various methods are disclosed herein with steps that are performed in exemplary orders. In alternative embodiments the steps may be performed in other orders without departing from the broader spirit and scope of the invention. All variations and alternative embodiments are considered within the sphere, spirit, and scope of the invention.
