Patent Application
20120136770
The disclosure relates to the clearing of financial instruments. More particularly, the disclosure relates to clearing financial instruments associated with a declining balance methodology.
Cumulative total indexes are known in the art. Cumulative total indexes are constructed as the summation of a series of financial values, or values of economic significance, observed over a specified time period. Examples of cumulative total indexes include the indexes that underlie various current or historical futures contracts. Dividend index contracts, as currently offered on EUREX, are constructed as the cumulative total of dividends accrued by the stocks that comprise a stock index. CME heating degree days (HDD) and cooling degree days (CDD) futures are settled against indexes that cumulate temperature readings over a specified period. Fed Fund futures traded at CME are based upon the arithmetic average effective overnight Fed Funds rate observed in the marketplace. Since the arithmetic average is equivalent to the sum total of the observed values divided by the number of observations, the latter being a predetermined number, the contract is effectively based on the cumulated sum. Reference to a cumulative index of ex post values may tend to obfuscate the economic variable that is being traded.
In addition, weather futures contracts are known in the art. Such weather derivatives make weather a tradable commodity. Therefore, allowing particular risks related to the temperature and other forces of nature to be managed and hopefully mitigated. The Chicago Mercantile Exchange (CME) offers exchange-traded weather derivatives that are standardized contracts traded publicly on the open market and reflect, through specific indexes, monthly and seasonal average temperature in over a dozen U.S. and European cities.
The present disclosure overcomes problems and limitations of the prior art by disclosing systems and method for clearing a financial instrument (e.g., a futures contract) administered with a declining balance methodology (DBM). The system, in some embodiments, determines an accrued amount for each elapsed interval of time (e.g., daily) and reduces a settlement price of the financial instrument by the accrued amount. The accrued amount, in some examples, may include a reported amount (e.g., dividend) associated with the financial instrument. The system may also transfer funds between the holder of positions in the financial instrument based on a function of the accrued amount calculated at each interval.
An embodiment may include a method for clearing a futures contract associated with a declining balance methodology (DBM). The method includes receiving orders for a futures contract associated with a DBM, matching a sell order for the futures contract with a buy order for the futures contract at the remaining portion of the cumulative sum that has yet to be realized or resolved, determining an accrued amount (e.g., a reported amount associated with the DBM, such as a dividend for one company or a group of companies) for an elapsed interval of time (e.g., one day), reducing the daily settlement price of the futures contract by the accrued amount, and causing an offsetting transfer of funds from the short position holder to the holder of the long positions. The transfer of funds between the holders may be a function of the accrued amount. The adjustment pursuant to the DBM may be published by an exchange to track prospective values of a cumulated time series.
Of course, the methods and systems of the above-referenced embodiments may also include other additional elements, steps, computer-executable instructions or computer-readable data structures. In this regard, other embodiments are disclosed and claimed herein as well. 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 various aspects of the invention are illustrated by way of example and not limited in the accompanying figures in which like reference numerals indicate similar elements and in which:
Financial and economic indices may be constructed in many different ways. Aspects of the disclosure describe a declining balance methodology (DBM) that may be referenced as a quoting and/or accounting basis for financial instruments (e.g., derivative, options, futures, and forward contracts) in various product sectors. Aspects of the disclosure overcome problems and limitations of the prior art by disclosing systems and method for quoting, adjusting and settling futures contracts by successively removing the just-realized variables from the quoted futures price to focus the quoted contract value to the remaining unrealized economic variables. Further, such systems and method for quoting, adjusting and settling the futures contracts will preserve the underlying economic consideration for the trade when compared with the traditional way of quoting futures based on the same cumulative sum.
Aspects of the disclosure represent a method of successive adjustments of daily settlement prices and administration of cash payment pass-through for contracts with values based on a cumulated time series of economic variables, e.g. dividend accrual, temperatures, etc. By the successive adjustments, the system causes the financial instruments to behave as if it is pricing in forward-looking components of the cumulative time series. The realized portion of the cumulative time series will have no further effects to the future pricing of the instruments, as the economic value of such portion will have been fully reflected on the course of the successive adjustments.
Systems and method are disclosed for administering the declining balance methodology (DBM) by successively adjusting the (daily) settlement price of the futures contract based on a cumulated sum, and administering a cash payment or adjustment to reflect the value of the current realization of the cumulant. This cash payment or adjustment will offset in part or all of the mark-to-market variation caused by the adjustment to the daily settlement price of the contract. As such, the price of the contract will thus continue to reflect the portion of the cumulated sum that has yet to be realized or determined. At the expiration of the contract, the final mark-to-market variation will be set at zero, for the aforementioned purpose, thereby causing the total mark-to-market variation to add up to the original trade price, while the total cash payment to total realized cumulated sum. In doing so, the original economics of the futures trade is achieved and remained unaltered while the quoting mechanism will focus on the remaining undetermined portion of the cumulative sum—thereby removing irrelevant information from obscuring the economic value of the contract.
Exchange computer system 100 may be implemented with one or more mainframes, servers, gateways, controllers, desktops or other computers. The exchange computer system 100 may include one or more modules, processors, databases, mainframes, desktops, notebooks, tablet PCs, handhelds, personal digital assistants, smartphones, gateways, and/or other components, such as those illustrated in
A user database 102 may include information identifying traders and other users of exchange computer system 100. Such information may include user names and passwords. A trader operating an electronic device (e.g., computer devices 114, 116, 118, 120 and 122) interacting with the exchange 100 may be authenticated against user names and passwords stored in the user database 112. Furthermore, an account data module 104 may process account information that may be used during trades. The account information may be specific to the particular trader (or user) of an electronic device interacting with the exchange 100.
A match engine module 106 may match bid and offer prices for orders configured in accordance with aspects of the invention. Match engine module 106 may be implemented with software that executes one or more algorithms for matching bids and offers for financial instruments in accordance with aspects of the invention. The match engine module 106 and trading system interface may be separate and distinct modules or component or may be unitary parts. Match engine module may be configured to match orders submitted to the trading system. The match engine module may match orders according to currently known or later developed trade matching practices and processes. In an embodiment, bids and orders are matched on price, on a FIFO basis. The matching algorithm also may match orders on a pro-rata basis or combination of FIFO and pro rata basis. Other processes and/or matching processes may also be employed.
Moreover, a trade database 108 may be included to store historical information identifying trades and descriptions of trades. In particular, a trade database may store information identifying or associated with the time that an order was executed and the contract price. The trade database 108 may also comprise a storage device configured to store at least part of the orders submitted by electronic devices operated by traders (and/or other users). A confirmation message may be sent when the match engine module 106 finds a match for an order and the order is subsequently executed. The confirmation message may, in some embodiments, be an e-mail message to a trader, an electronic notification in one of various formats, or any other form of generating a notification of an order execution.
Furthermore, an order book module 110 may be included to compute or otherwise determine current bid and offer prices. The order book module 110 may be configured to calculate the price of a financial instrument. A risk management module 134 may be included in computer system 100 to compute and determine the amount of risk associated with a financial product or portfolio of financial products. An order processor module 136 may be included to receive data associated with an order for a financial instrument. The module 136 may decompose delta based and bulk order types for processing by order book module 110 and match engine module 106. The order processor module 136 may be configured to process the data associated with the orders for financial instruments.
In addition, a market data module 112 may be included to collect market data and prepare the data for transmission to users. In one embodiment, the market data module 112 may publish the value of the current accrual amount, and/or the daily settlement price adjustment amount, and/or the cash payment amount. The market data module 112 may regularly disseminate updates to the index, including updates to the index that may occur as values being tracked by the index (e.g., dividend announcements) are reported. In some embodiments in accordance with aspects of the invention, the market data module 112 may update the index on a daily basis (e.g., at the end of each trading day).
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 local area network (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.
The operations of computer devices and systems shown in
One or more market makers 130 may maintain a market by providing 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, such as clearinghouse 140. Coupling can be direct as described or any other method described herein.
A clearinghouse 140 enables an exchange computer system 100 to provide contracts with mutualized risk of counterparty credit risk than over-the-counter (OTC) products. A clearinghouse 140 arranges for transactions to be settled and cleared. Clearing is the procedure through which a clearinghouse 140 becomes buyer to each seller of a contract (e.g., futures contract, equities, currencies, interest rate products, etc.), and seller to each buyer, and assumes responsibility for protecting buyer and seller from financial loss by assuring performance on each contract. A clearinghouse 140 may settle trading accounts, clear trades, collect and maintain performance bond funds, regulate delivery and report trading data. In some scenarios an exchange may operate its own clearinghouse 140 through a division of the exchange through which all trades made are confirmed, matched, and settled each day until offset or delivered. In other words, the exchange computer system 100 may be internal to the clearinghouse 140. Alternatively, one or more other companies may be provided the responsibility of acting as a clearinghouse 140 with the exchange (and possibly other exchanges). An exchange may have one or more clearinghouses associated with the exchange. An exchange may offer firms qualified to clear trades to provide a clearinghouse 140 for the exchange computer system 100. In some instances, these clearing members may be designated into different categories based on the type of commodities they can clear and other factors.
The clearinghouse 140 may establish minimum performance bond (i.e., margin) requirements for the products it handles. A customer may be required to deposit a performance bond with the clearinghouse 140 (or designated account) for the purpose of insuring the clearinghouse 140 against loss on open positions. The performance bond helps ensure the financial integrity of brokers, clearinghouses, and exchanges as a whole. If a trader experiences a drop in funds below a minimum requirement, the clearinghouse 140 may issue a margin call requiring a deposit into the margin account to restore the trader's equity. A clearinghouse 140 may charge additional performance bond requirements at the clearinghouse's discretion. For example, if a clearinghouse's potential market exposure grows large relative to the financial resources available to support those exposures, the clearinghouse 140 may issue a margin call.
In another embodiment, the clearinghouse 140 may require a larger performance bond based on a credit check (e.g., an analysis of the credit worthiness, such as using a FICO™ or comparable score, inter alia) of the customer/trader. The credit check may be performed (i.e., initiated) by a clearinghouse 140 or an exchange 100. In the example where the clearinghouse 140 performs the credit check, the clearinghouse 140 may send a message (e.g., enforcement message) to the exchange 100. If the credit check indicates that a customer/trader is a high risk, the enforcement message may increase the margin requirements of the customer/trader, or otherwise adjust the capabilities/constraints of the customer/trader commensurate with the higher risk. In the example where the exchange 100 initiates the credit check, the exchange 100 may send a message to one or more clearinghouses associated with the exchange 100 to update them on the increased/decreased risk associated with the customer/trader.
In recognition of the desire to promote efficient clearing procedures and to focus on the true intermarket risk exposure of clearinghouses, a cross-margining system may be used. By combining the positions of joint and affiliated clearinghouses in certain broad-based equity index futures and options into a single portfolio, a single performance bond requirement across all markets may be determined. The cross-margining system may greatly enhance the efficiency and financial integrity of the clearing system.
The principal means by which a clearinghouse 140 mitigates the likelihood of default is through mark-to-market (MTM) adjustments. The clearinghouse 140 derives its financial stability in large part by removing debt obligations among market participants as they occur. Through daily MTM adjustments, every contract is debited or credited based on that trading session's gains or losses. For example, as prices move for or against a position, funds flow into or out of the trading account. This cash flow is known as settlement variation.
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
The computer system 100 may have one or more input/output devices/interfaces 210 (e.g., keyboard, mouse, voice automation, screen, kiosk, handheld computing device display, voice, ethernet interface, modem interface, network interface, etc.) Computing device 120 may be a laptop computer, handheld computing device, or any other mobile computing device. In one embodiment in accordance with the invention, a user of computing device 208 can remotely communicate, through wired or wireless communication networks, to computer system 100 at a clearinghouse or exchange. The user may remotely enter orders for financial instruments offered by the exchange and indicate a bank account to pay margin requirements and receive cash flows resulting from market changes, dividends, etc.
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 the embodiment where the contract is subject to a DBM, such as illustrated in
In some embodiments in accordance with aspects of the invention, the DBM may track prospective values of a cumulated time series and may be published (see
The contract price may begin at a seeded initial value and decline to zero over a period of time. The seeded initial value may be selected, in some embodiments, arbitrarily by the publisher of an index associated with the DBM. In other embodiments, the seeded initial value may be established at an estimate of what the cumulated total value over the accumulation period might be, for example, by reference to historical cumulated values from past periods. In yet other embodiments, the initial seeded value may be set at the spot value at the date of creation of the futures contract.
Referring to
In one example in accordance with various aspects of the disclosure, the sum total of dividends accrued to an S&P 500 index portfolio may be the underlying for a futures contract. This sum total may be expressed in terms of index points. For example, for a Standard & Poor (S&P) 500 index at about 1,000 points, assuming the total accumulation period is one year, a 2% dividend yield implies approximately 20 index points as the dividend accrual for a year. Thus, a futures contract based on the total accrual for a one-year period shall be priced at approximately 20 index points, with each index point worth a fixed number of currency (e.g., U.S. dollars). For example, assuming a market participant buys the futures contract at a price of 20 index points, then he will derive a profit if the total accrual during the 1-year period is above 20 index points and he holds the position until expiration. Conversely, if the realized accumulation falls below 20 index point by the expiration, he will derive a loss from the trade if he holds the position until expiration.
In accordance with various aspects of the invention, at any point following the start of the accumulation period, the dividends may begin to accrue. By way of contrast, if the futures contract is not designed pursuant to a DBM methodology in accordance with aspects of this disclosure, then the price of the contract will continue to reflect the accrual of dividends for the entire accumulation period. After the commencement of the accumulation period, dividend accruals, if any, may be calculated at the close of trading each day. As such, these accruals will factor into the final settlement price of the contract but do not contain any information that is not already determined and will no longer change. As such, the price of the futures contract will continue to reflect this stale information that has no economic purpose. The remaining uncertainty is the amount of dividends to be accrued between now and the expiration of the contract. Thus, the DBM methodology is designed to remove the previous accumulation information by a process that takes the stale information out from the price of the futures contract so that the price will reflect information that has yet to be revealed.
For example, assuming the total time has not expired (i.e., the financial instrument has not reached its settlement date), in step 406, for each elapsed interval of time (e.g., daily), the computer system 100 may calculate an accrued amount. The accrued amount may include the reported amount associated with the financial instrument associated with the DBM. For example, given a financial instrument that tracks dividends posted by companies in the S&P500, each day dividends posted by each company in index may be summed and reported as the accrued amount for that elapsed interval of time. One skilled in the art will appreciate that for purposes of this disclosure a dividend may be reported when the dividend is actually issued to shareholders, when it is announced by a company, or any other time when a dividend-related event occurs.
The computer system 100 may use this accrued amount for the elapsed interval of time to reduce the current price of the financial instrument. Assuming the current settlement price is greater than this accrued amount, in some embodiments, the contract price may be reduced (see step 408) by the amount of the accrued amount. Meanwhile, in alternate embodiments, the contract price may be reduced by a function of the accrued amount (e.g., by a predetermined percentage of the accrued amount, or according to a predetermined mapping between the accrued amount and the amount of reduction.)
Further, by eliminating the stale accumulation from the price of the futures contract, the market can be organized in an efficient manner. For example, assume that there are two dividend futures on the S&P 500 index. The first contract has an accumulation period of one year, e.g. from January to December. The second contract has an accumulation period of only six months, from July to December. Notice that the termination times of the accumulation for the two contracts are the same but the commencements of the periods are different. By way of contrast, if the contracts are not written in accordance with various aspects of the DBM methodology disclosed herein, the first contract may have a price of 20 index points while the latter may have a price of 10 index points. By July, however, the information pertaining to the accrual of the dividends from January through June will be trivial. It will be factored into the prices of the first contract but not the second contract. Meanwhile, the two contracts would remain distinct as they will have different terms, i.e. accumulation periods. In accordance with various aspects of the disclosure, by July, the former contract that originally covers one-year of accrual of dividend will have been adjusted in such a way that the price will reflect the value of the dividend accrual that remains undetermined (i.e., from July to December.) As such, by then, the original one-year dividend accrual contract is indistinguishable from the contract that was originally covering only from July to December.
In addition, in accordance with various aspects of the disclosure, adjustment of the daily settlement prices and the corresponding “side” cash payments work as follows. On each day, the clearinghouse may query the contract to determine whether the accumulation period has started. If the accumulation period of a contract has started, the clearinghouse may query the accrual amount for the day. By way of example, assuming the dividend futures contract is marked to a market price of 20 index points at the end of the day. The clearinghouse ascertains that the accrual amount for the day is 0.50 index points. The clearinghouse may: (i) adjust the mark-to-market price, and/or (ii) cause a “side” cash payment. The clearinghouse may adjust (see step 408) the mark-to-market price of 20 index points down by the accrual amount for the day, or from 20 index points to 19.50 index point. The clearinghouse would then perform a mark-to-market variation from the previous day. Thus, the adjustment of the daily mark-to-market price (or daily settlement price, hereafter used interchangeably) will represent an extra 0.50 index point in favor of the short position holder. Note that in this example the settlement price may never be adjusted below zero, reflecting the fact that the cumulants in the future cannot be negative. In addition, the clearinghouse will further cause a “side” payment of 0.50 index points, the amount of the current accrual, from short to long position holders (see step 410).
In step 410, a pass-through occurs where funds are caused to be transferred from the account of the holder of the short position to the account of the holder of the long position. The amount of funds transferred is based on the accrued amount. In one embodiment, the transferred funds are equal to the accrued amount. Meanwhile, in alternate embodiments, the transferred funds may be a function of the accrued amount (e.g., a predetermined percentage of the accrued amount, or according to a predetermined mapping between the accrued amount and the amount of transferred funds.) The computer system 100 may cause a financial institution to effect a transfer of funds (e.g., credit one account and debit another account) as described herein.
The net result of these two additional actions are two fold: (i) these two actions will offset each other on most days, i.e. long pays short extra 0.50 index points via mark-to-market while the short pays long 0.50 index point to reflect the daily accrual; thus if there is no change in the market forecast of the dividend paying pattern, the sum total of payment is zero; (ii) the price of the dividend futures will be adjusted down by 0.50 index points, reflecting the fact that the accumulation period is shortened. Previously accrued dividend information has already been settled and will have no further impact on the prices of the futures contract that is written pursuant to the DBM methodology in accordance with the disclosure.
In other words, the net effect of the reducing step (i.e., step 408) and the causing a transfer of funds step (i.e., step 410) is zero. It is the “pass-through” feature disclosed herein that offsets the settlement price linked to the financial instrument. The pass-through is a regular, recurring (e.g., on a daily basis) transfer. In one embodiment, the daily pass-through represents a cash payment made on a daily basis from the account of the short to the account of the long held at the clearinghouse 304 in an amount equal to the observed values. As illustrated in
Continuing with the earlier example, at the expiration of the contract, the final value of the daily settlement is zero (see step 414). In doing so, the sum total of the adjustment of the daily settlement prices is the price originally entered into at the time of trade. Thus, if the long position is established at 20.00 index points, through this series of daily settlement adjustment, the total payment from long to short (see step 412) shall be 20.00 index points. On the other hand, the sum total of payments from short to long through the “side” cash payments each day will add up to the sum total of the daily accrual amount (since the time of trade, or the start of the accumulation period, whichever is later.) Therefore, these successive adjustments and “side” cash payments (or pass-throughs) will add up to the original economic terms of the trade. If the total accrual of the period were 21 index points, the net result is that the long position holder will gain 1 index point (pay 20 index points through daily adjustments, collect 21 index points through the side cash payments). This reflects the economic outcome desired when the trade is entered into.
In those scenarios where the settlement price of the contract is not greater than accrued amount for the elapsed interval of time, the settlement price is reduced to zero (see step 416), and the computer system 100 causes a transfer of funds (in step 410) from the holder of the short to the holder of the long. The transferred funds are equal to the difference between the settlement price and the accrued amount. For each subsequent interval of time until the expiration of the financial contract, the accrued amount may be transferred from the holder of the short to the holder of the long. In other words, if the settlement price reaches zero before the expiration of the financial instrument, then subsequently reported values result in a profit to the holder of the long position. The income stream to the long position concludes at the expiration of the financial instrument linked to the a declining balance methodology.
However, in some scenarios the settlement price may be greater than zero for all time intervals before the settlement date. In such a scenario, at the expiration of the total time of the financial instrument linked to the DBM, the computer system 100 may cause a one-time transfer of funds (see step 412) from the holder of the long order to the holder of the short order. The final transferred funds may be a function of the declining balance methodology. In some embodiments, the final transferred funds may be equal to the settlement price when the total time expires (i.e., time tend). Then, in step 414, the final settlement price may be optionally set to zero. Once the financial instrument, the parties to the financial instrument will proceed to settle their positions and the instruments shall seize to have further effect.
Referring to
Referring to
However, in the example of
While there may be myriad applications for a declining balance methodology (DBM), numerous examples in this disclosure describe the administration of a DBM-linked futures contract for purposes of illustration. In accordance with various aspects of the disclosure, such a financial instrument may be deployed as the basis for a cash-settled derivatives contract. That index-linked derivative contract may be constructed in the form of a futures contract, a derivative contract, an over-the-counter (OTC) swap, as the basis for a cash-settled option, or as an option on an index-linked futures contract. Analogous processes may be deployed in the context of other derivatives contracts.
In addition, a declining balance dividend index (DBDI) futures contract can provide a useful price discovery function to the extent that stock index futures traders typically quote dividend streams in terms of the expected ex post dividends to be accrued until futures contract maturity. Such a futures contract facilitates the activities of traders who wish to gain risk exposure to dividend streams. If a trader expects that future dividend payments will exceed the value at which futures are trading, then she may wish to buy futures. If she believes that future dividend payments will be less than the value at which futures are trading, then she may sell the futures. As a result, such a futures contract will generally be traded at levels that reflect the market's aggregate expectations regarding the remaining values to be deducted from the spot index.
Declining balance dividend index futures would represent a useful tool for arbitrageurs. The clearinghouse 304 may assist in trading, clearing, etc. a futures contract tracking the index. Such a contract may permit traders to hedge against risks associated with an attribute of an asset (e.g., an equity, a stock, a commodity, etc.) Thus, the futures contract may be useful for price discovery, for taking a position on the financial or economic number represented in the index, or for purposes of cash/futures arbitrage activity. For example, a declining balance dividend index futures contract may be useful to arbitrageurs who take counteracting positions in stock index futures versus baskets of stocks represented in the index in question. A cash stock position entails the receipt (long stock position) or implicit payment (short stock position) of dividends; likewise, stock index futures reflect expected stock dividend streams. Opinions regarding future dividend streams vary and arbitrageurs commonly study and predict corporate dividend patterns.
Aspects of the disclosure have potential applications in many different prospective market sectors. For example, a stock index dividend product (e.g., stock dividend derivatives) may be created in accordance with various aspects of the disclosure. The disclosure may be applied broadly in creating any financial or economic index using the herein described declining balance methodology. In particular, the methodology advantageously creates transparency by quoting the remaining value instead of largely irrelevant cumulative past values of an index. For example, the declining balance methodology may be used with weather contracts, where the reported amount is a function of a measurement of the sum of daily temperature readings (e.g., daily high temperature, daily low temperature, etc.) expected for a period of time in a predetermined geographic area. Such an instrument may be especially useful to traders dealing with futures contracts involving agricultural products (e.g., corn, wheat, etc.)
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. All are considered within the sphere, spirit, and scope of the invention. For example, aspects of the invention are not limited to implementations that involve the trading of derivative products. Embodiments of the present invention can be extended for any market, future, option, forward or other financial instrument, investment vehicle, or equity product. Those skilled in the art will appreciate that aspects of the invention may be used in other markets, such as weather index futures markets, for example, to manage risk parameters.
