Source: http://www.google.com/patents/US20040117291?ie=ISO-8859-1&dq=patent:7076806
Timestamp: 2014-08-29 20:53:37
Document Index: 763556846

Matched Legal Cases: ['art 10', 'art 10', 'art 10', 'art 20', 'art 20', 'art 10', 'art 30', 'arts 10', 'art 10', 'art 30']

Patent US20040117291 - Method of trading derivative investment products based on an index adapted ... - Google PatentsSearch Images Maps Play YouTube News Gmail Drive More »Sign in<nobr>Advanced Patent Search</nobr>PatentsMethods of creating indexes to reflect the relative performance of a pair of investment assets are provided. Also provided are methods of trading derivative investment products based on such an indexes. According to embodiments the invention index values are calculated based on the single day percentage...http://www.google.com/patents/US20040117291?utm_source=gb-gplus-sharePatent US20040117291 - Method of trading derivative investment products based on an index adapted to reflect the relative performance of two different investment assetsAdvanced Patent SearchPublication numberUS20040117291 A1Publication typeApplicationApplication numberUS 10/319,157Publication dateJun 17, 2004Filing dateDec 12, 2002Priority dateDec 12, 2002Also published asUS20090138411Publication number10319157, 319157, US 2004/0117291 A1, US 2004/117291 A1, US 20040117291 A1, US 20040117291A1, US 2004117291 A1, US 2004117291A1, US-A1-20040117291, US-A1-2004117291, US2004/0117291A1, US2004/117291A1, US20040117291 A1, US20040117291A1, US2004117291 A1, US2004117291A1InventorsDennis O'CallahanOriginal AssigneeO'callahan Dennis M.Export CitationBiBTeX, EndNote, RefManReferenced by (7), Classifications (6), Legal Events (1) External Links: USPTO, USPTO Assignment, EspacenetMethod of trading derivative investment products based on an index adapted to reflect the relative performance of two different investment assetsUS 20040117291 A1Abstract Methods of creating indexes to reflect the relative performance of a pair of investment assets are provided. Also provided are methods of trading derivative investment products based on such an indexes. According to embodiments the invention index values are calculated based on the single day percentage change in the value of each asset, the cumulative relative change in the value of each asset, or the average daily relative change in the value of each asset. According to an embodiment all positions in derivative investment products based on an index are settled in cash at the end of each trading session, and the index is reset to a base value prior to trading the derivative investment products in the next session. Images(6) Claims(27)
where X and Y are multipliers, Δ%A1 is the one day percentage change in the value of the first asset, and Δ%A2 is the percentage change in the value of the second asset. 18. The method of claim 17 wherein at least one of X and Y are equal to 1. 19. The method of claim 17 wherein the reset value equals 100. 20. The method of claim 16 wherein said first and second assets comprise one or more of commodities, securities, derivatives or economic indicators. 21. A method of trading index based derivative investment products comprising the steps of: settling all positions taken relative to said derivative investment products in cash on a predetermined regular basis; and resetting the index to a base value after said positions are settled and prior to resuming trading the index based derivative investment products. 22. The method of claim 21 wherein said positions are cash settled at the end of each trading session, and wherein all positions remain open until expiration. 23. A method of trading derivative investment products comprising the steps of: creating a performance index which reflects the relative performance between a first dynamic market variable and a second dynamic market variable; listing derivative investment products based on said performance index on an exchange; and executing trades by matching bids and offers to buy or sell derivative investment products. 24. The method of claim 23 wherein the step of creating a performance index comprises creating a cumulative performance index which reflects the cumulative relative performance between the first dynamic variable and the second dynamic variable over a period of time. 25. The method of claim 24 wherein said cumulative performance index is calculated according to the formula CP INDEX = 100 + %   Δ   ASSET   A - %   Δ   ASSET   B T 1 - T 0 26. The method of claim 23 wherein the step of creating a performance index comprises creating an average daily performance index which reflects the average of the daily relative performance between the first dynamic variable and the second dynamic variable. 27. The method of claim 26 wherein said average daily performance index is calculated according to the formula ADP Index = 100 + ∑ o l   %   s . d . Δ   Asse  t  A - %   Δs . d . Asse  tB T i - T o Description
BRIEF DESCRIPTION OF THE FIGURES [0017]FIG. 1 is a flowchart showing a method of trading performance futures contracts according to the present invention. [0018]FIG. 2 is a chart showing the performance of a first asset, a second asset and a performance index according to the present invention over a five-day period. [0019] FIGS. 3(a), 3(b), and 3(c) are graphical representations of the performance of the first asset, the second asset and the performance index for the same five-day period as the chart in FIG. 2. [0020]FIG. 4 is a chart showing the daily net gain/loss and cumulative net gain/loss for two investors who have taken opposite positions in a performance futures contract. [0021]FIG. 5 is a chart showing the performance of a first asset, a second asset and a cumulative performance index according to an embodiment of the present invention over a five-day period. [0022] FIGS. 6(a), 6(b), and 6(c) are graphical representations of the performance of the first asset, the second asset and the cumulative performance index for the same five-day period as the chart in FIG. 5. [0023]FIG. 7 is a chart showing the performance of a first asset, a second asset and a average daily performance index according to an embodiment of the present invention over a five-day period. [0024] FIGS. 8(a), 8(b), and 8(c) are graphical representations of the performance of the first asset, the second asset and the average daily performance index for the same five-day period as the chart in FIG. 7.
PI=100+{%ΔS DAsset A−%ΔS DAsset B} [0028] wherein %ΔS D. Asset A represents the single day percentage change in the value of the first asset and %ΔS D Asset B represents the single day percentage change in the value of the second asset. The single day percent change in Assets A and B is calculated by subtracting the asset's previous day's closing price from the asset's current price, dividing the result by the previous day's closing price and multiplying by 100, or %   Δ SD = P 1 - P c P c � 100 [0029] where Pt is the current price of the asset at time t and Pc is the closing price of the asset the previous day. Additionally, the percentage change of each asset may be weighted differently. For example, if it can be expected that the value of the two assets will change at a ratio of approximately 3:2, the single day percentage change of Asset A may be multiplied by a weighting multiplier of 2, and that of Asset B may be multiplied by a weighting multiplier of 3. [0030] Step S2 of the method disclosed in FIG. 1 calls for the creation of performance futures contracts based on the performance index created in step S1. Creation of a performance futures contract requires the participation of two investors. The first investor agrees to take a �long� position (anticipating that the index value will rise) and the second investor must take a corresponding �short� position (anticipating that the index value will fall). The investor taking the short position agrees to pay to the holder of the long position an amount equal to the change in value of the index times some multiplier if the index value rises. Conversely, the investor taking the long position agrees to pay an amount equal to the change in value of the index times the same multiplier to the holder of the short position if the index loses value. [0031] In addition to entering new performance futures contracts at their creation, investors can trade into and out of the performance futures market by buying and selling existing contracts, as indicated by step S3. [0032] A feature of the performance futures contracts created and traded according to this embodiment of the present invention is that they are cash settled at the end of each trading session. As shown in step S4 the value of the performance index is determined at the end of each trading session and all positions taken relative to the index are settled in cash. Thus, if the index closes above 100 (the starting point for each session) those investors who took a long position relative to the index will be credited an amount equal to the change in the value of the index multiplied by a multiplier. Likewise, those investors who took a short position relative to the index will be charged an amount equal to the change in the value of index multiplied by the same multiplier. If the index closes lower rather than higher, the same settlement process takes place, only the roles are reversed. The investors who took a short position are paid and the investors who took a long position are charged. Once the accounts have been settled the index is reset to 100 prior to the opening of the next trading session, as indicated in step S6. [0033] Once the index is reset, a determination must be made as to whether the expiration date of the performance futures contract has been reached. As shown in decision step S7, if the present date equals the expiration date of the futures contract, then trading on the contract ends at step S8. Otherwise, if the contract's expiration date has not been reached, the process returns to step S3 where trading on the performance futures contract may begin again at the opening of the next trading session. Accounts with open positions are settled again at the end of the next session and the process continues until the performance futures contract expires. [0034] An example of the operation of a performance futures contract based on a performance index according to the present invention will now be described in relation to FIGS. 2-4. FIG. 2 shows a chart 10 which displays the daily performance of a first asset 12, a second asset 14, and a performance index 16 derived from the relative performance of the first and second assets. The chart 10 shows the closing price of each asset and the closing value of the performance index for five consecutive days, along with the percentage change in the value of each asset from day to day. The closing price of Day 0 is provided in order to calculate the percentage change in the first and second assets on Day 1. [0035] FIGS. 3(a), 3(b), and 3(c) show the opening/closing values of the first and second assets and the performance index in graphical form for the same five day period covered by the chart in FIG. 2. [0036] Finally, FIG. 4 is a chart showing the daily net gain/loss and the cumulative gain/loss for two investors who have taken opposite positions in a performance index futures contract. Investor 1 has taken a long position relative to the performance index, and Investor 2 has taken a short position. In the example, a single contract having a value of 100 times the index value will be considered. Since the index value begins at 100, each investor has a $10,000 interest in the index. The contract is cash settled at the end of each trading session. Therefore, if the index rises during the course of a session, the investor holding a long position relative to the index will be paid an amount equal to the change in value of the index multiplied by 100. The roles are reversed if the index falls during the session. Since the index is reset to 100 before the beginning of each session, each investor starts each day with a $10,000 stake in the index. The cash settlement at the end of each session is charged from and paid to the investors directly, leaving the investors' underlying investment unchanged. [0037] Turning to the chart 10 of FIG. 2, Asset A closed at a value of 934.82 at the end of trading on Day 0, the day before our example begins. Asset B closed at 8823.93 on Day 0. On Day 1, both Asset A and Asset B lost value. Asset A closed at 917.87, a single day percentage change of −1.81%. Asset B dropped to 8694.09, a single day percentage change of −1.47%. Although Asset A and Asset B both declined in value, Asset B outperformed Asset A in that the percentage drop in Asset B was not as great as the percentage drop in Asset A. Applying the formula for calculating the performance index.
CP Index=100+%ΔAssetA−%ΔAssetB/T 1 −T 0 [0046] Wherein %Δ Asset A is the percentage change in the value of Asset A since the inception of the index, %Δ Asset B is the percentage change in the value Asset B since the inception of the index, and the Quantity T1−T0 is the number of days (either trading days or calendar days) which have passed since the inception of the index. Unlike the previous embodiment, this index is not reset after each trading session. Rather according to this embodiment the index tracks the relative performance of the two assets over an extended period of time. [0047] An example of the performance of an index according to this second embodiment of the invention is shown in FIGS. 5 and 6. FIG. 5 is a chart 20 which displays the daily performance of a first Asset 22, a second Asset 24, and the corresponding performance of the cumulative performance index itself 26. The chart 20 of FIG. 5 is very similar to the chart 10 displayed in FIG. 2. The two charts show the daily performance of the same two assets over the same 5 day period. Thus, Asset A had a starting value of 934.82 when the index began. After the first day Asset A closed at a value of 917.87, a percentage change of −1.81% from the opening value. On day 2 Asset A closed at 934.82, 947.95 on day 3, 940.86 on day 4 and 962.27 on day 5, for cumulative percentage changes of −1.81, 0.00, +1.40, +0.65 and +2.94 for days 2, 3, 4 and 5 respectively. Similarly, Asset B began at 8823.93 and closed at 8694.09 on day 1, a −1.47% change. Further Asset B closed at 8824.41 on day 2, 8919.01 on day 3, 8872.96 on day 4 and 9053.64 on day 5, percent changes of +0.01, +1.08, +0.56, and +2.54 respectively. Applying formula (2) above, the cumulative performance index value is calculated to be 99.66 for day 1, 100.01 for day 2, 100.11 for day 3, 100.02 for day 4 and 100.08 for day 5. [0048] For comparison purposes the performance of Assets A and B and the cumulative performance index are shown in line graph form in FIGS. 6(a), 6(b) and 6(c). The charts of FIGS. 6(a) and 6(b) are identical to those of FIGS. 3(a) and 3(b) since they depict the performance of the same assets over the same period of time. The chart in FIG. 6(c), however is significantly different than that of FIG. 3(c) since the two indexes measure substantially different aspect of the relative performance between Assets A and B. [0049] Derivative investment instruments such as futures and options contracts may be traded based on the cumulative performance index just as with traditional market indexes. Such contracts have fixed expiration dates. Unlike the first embodiment, the cumulative performance index is not reset at the end of each trading session. Thus, there is no need for daily cash settlement of all positions. Rather, all accounts are cash settled upon expiration of the derivative contract. [0050] In still another embodiment of the invention an index is created which tracks the average relative daily performance between a pair of assets. Again, the assets may be selected from a wide variety of financial instruments spanning many asset classes, for a virtually limitless number of possible asset combinations. Once a pair of assets has been selected, the index value is calculated according to the formula ADP Index = 100 + ∑ o l   %   s . d . ΔAsset  A - %   Δ   s . d . Asse  tB T i - T o [0051] wherein %S D Asset A is the single day percent change in the value of Asset A, %S D Asset B is the single day percent change in the value of Asset B, i is the number of days the index has been in existence and the quantity T1−T0 is the length of time over which the index is averaged. As with the previous embodiment, and unlike the first embodiment, this index is not reset at the end of each trading session. According to this embodiment the relative daily performance of the two assets is averaged over time. [0052] An example of an average daily performance index according to this third embodiment of the invention is shown in FIGS. 7 and 8. FIG. 7 is a chart which displays the daily performance of a first Asset 32, a second Asset 34 and the corresponding performance of the average daily performance index itself 36. Again the chart 30 shown in FIG. 7 is similar to the charts 10 and 20 found in FIGS. 2 and 5. All three charts show the performance of the same two assets over the same 5 day period. Accordingly, Asset A has a value of 934.82 at the inception of the index, a closing value of 917.87 on day 1, 934.82 on day 2, 947.95 on day 3, 940.86 on day 4 and 962.27 on day 5. As with the chart 10 of FIG. 3 the single day percent change in Asset A shown in Chart 30 is −1.81% for day 1, +1.85 for day 2, +1.40 for day 3, −0.75 for day 4 and +2.28 for day 5. Meanwhile Asset B had a starting value of 8823.93 at the start of the index. Asset B closed at 8694.09 at the end of day 1, 8824.41 at the end of day 2, 8919.01 at the end of day 3, 8872.96 at the end of day 4, and 9053.64 at the end of day 5. Thus, the single day percentage change for Asset B was −1.47 for day 1, +1.50 for day 2, +1.07 for day 3, −0.52 for day 4 and +2.04 for day 5. Applying formula (3) for calculating the average daily performance index, the index has a value of 99.66 at the end of day 1, 99.84 at the end of day 2, 99.95 at the end of day 3, 99.89 at the end of day 4 and 99.94 at the close of day 5. [0053] For comparison purposes the performance of Assets A and B and the average daily performance index are shown in line graph form in FIGS. 8(a), 8(b) and 8(c). The charts of FIGS. 8(a) and 8(b) are identical to those of FIGS. 3(a), 3(b) and 6(a), 6(b) since they reflect the performance of the same assets over the same time period. The chart in FIG. 8(c), however, is significantly different than that of FIGS. 3(c) and 6(c) since the average daily performance index measures a substantially different aspect of the relative performance between Assets A and B. [0054] Derivative investment instruments such as futures and options contracts may be traded based on the average daily performance index just as with traditional market indexes. Such contracts will have fixed expiration dates. Unlike the first embodiment, the average daily performance index is not reset at the end of each trading session. Thus there is no need to settle positions at the end of each session. Rather, all positions are settled in cash upon expiration. [0055] It should be understood that various changes and modifications to the presently preferred embodiments described herein will be apparent to those skilled in the art. Such changes and modifications can be made without departing from the spirit and scope of the present invention and without diminishing its intended advantages. It is therefore intended that such changes and modifications be covered by the appended claims. Referenced byCiting PatentFiling datePublication dateApplicantTitleUS7409367May 4, 2001Aug 5, 2008Delta Rangers Inc.Derivative securities and system for trading sameUS7739178Jan 30, 2008Jun 15, 2010Merrill Lynch Co., Inc.System and method for emulating a long/short hedge fund index in a trading systemUS7778918May 25, 2007Aug 17, 2010Merrill Lynch & Co., Inc.System and method for providing an index linked to separately managed accountsUS8515849 *Dec 30, 2010Aug 20, 2013The Nasdaq Omx Group, Inc.Techniques for producing relative performance based indexes with corresponding tradable financial productsUS20120066148 *Dec 30, 2010Mar 15, 2012Sagi Jacob STechniques for Producing Relative Performance Based Indexes with Corresponding Tradable Financial ProductsUS20130304628 *Jul 17, 2013Nov 14, 2013The NASDAQ OMX Group Inc.Technolgy for producing relative performance based indexes with corresponding tradable financial productsWO2006033749A2 *Aug 22, 2005Mar 30, 2006Peter KleidmanFinite equity financial instruments* Cited by examinerClassifications U.S. Classification705/37International ClassificationG06Q40/00Cooperative ClassificationG06Q40/06, G06Q40/04European ClassificationG06Q40/04, G06Q40/06Legal EventsDateCodeEventDescriptionDec 12, 2002ASAssignmentOwner name: CHICAGO BOARD OPTIONS EXCHANG, INCORPORATED, ILLINFree format text: ASSIGNMENT OF ASSIGNORS INTEREST;ASSIGNOR:O CALLAHAN, DENNIS M.;REEL/FRAME:013588/0316Effective date: 20021211RotateOriginal ImageGoogle Home - Sitemap - USPTO Bulk Downloads - Privacy Policy - Terms of Service - About Google Patents - Send FeedbackData provided by IFI CLAIMS Patent Services©2012 Google