Source: http://www.google.com/patents/US8046291?dq=5,687,325
Timestamp: 2014-09-19 14:40:36
Document Index: 370761452

Matched Legal Cases: ['Application No. 60', 'arty 31', 'arty 31', 'arty 31', 'arty 31', 'arty 31', 'arty 31', 'arty 31']

Patent US8046291 - Redemption of derivative secured index participation notes - Google PatentsSearch Images Maps Play YouTube News Gmail Drive More »Sign in<nobr>Advanced Patent Search</nobr>PatentsTechniques are described for securitizing, administrating and trading various index shares securitized by derivative, cash-settled instruments on the underlying index....http://www.google.com/patents/US8046291?utm_source=gb-gplus-sharePatent US8046291 - Redemption of derivative secured index participation notesAdvanced Patent SearchPublication numberUS8046291 B2Publication typeGrantApplication numberUS 11/553,550Publication dateOct 25, 2011Filing dateOct 27, 2006Priority dateApr 24, 2006Also published asUS20080040291, US20120116995Publication number11553550, 553550, US 8046291 B2, US 8046291B2, US-B2-8046291, US8046291 B2, US8046291B2InventorsSteven M. BloomOriginal AssigneeThe Nasdaq Omx Group, Inc.Export CitationBiBTeX, EndNote, RefManPatent Citations (61), Non-Patent Citations (41), Classifications (9), Legal Events (4) External Links: USPTO, USPTO Assignment, EspacenetRedemption of derivative secured index participation notesUS 8046291 B2Abstract Techniques are described for securitizing, administrating and trading various index shares securitized by derivative, cash-settled instruments on the underlying index.
1. A computer implemented method of redeeming Index Participation Notes, the method comprising:
receiving, by one or more computers, information related to a received request to redeem one or more creation unit size aggregations of Index Participation Notes from a holder of one or more creation unit size aggregations of Index Participation Notes that are secured by one or more derivative financial instruments on a financial index and an amount of cash substantially equal to a mark price for one of the one or more derivative financial instruments at a time of generation of the Index Participation Notes, with the redemption request being received on a date that is prior to a settlement date of the one or more derivative financial instruments;
receiving by the one or more computers, changes to the mark price of the one or more derivative financial instruments; and
calculating by the one or more computers, based at least in part on the changes to the mark price of the one or more derivative financial instruments over a period between issuance of the one or more derivative financial instruments and receipt of the redemption request, an amount of cash to deliver along with the one or more derivative financial instruments of the financial index included in the creation unit to the holder of the Index Participation Notes in exchange for the creation unit size aggregations of Index Participation Notes;
delivering the amount of cash to the holder of the Index Participation Notes; and
delivering the one or more derivative financial instruments of the financial index to the holder of the Index Participation Notes.
2. The computer implemented method of claim 1, wherein the one or more derivative financial instruments comprises a long index futures contract having an initial mark price on an issue date of the futures contract and having a contract multiplier.
3. The computer implemented method of claim 2, wherein the amount of cash is determined by a current mark price for the long index futures contract on the date of receipt of the redemption request multiplied by the contract multiplier.
4. The method of claim 3, wherein the amount of cash further comprises accrued interest.
5. The computer implemented method of claim 1, wherein the one or more derivative financial instruments comprises:
a short put index options contract with the long call index options contract and the short index put options contract having the same initial strike price and the same expiration date.
6. The computer implemented method of claim 5, wherein the amount of cash is determined by the initial strike price of one of the long call and short put index options contracts multiplied by a contract multiplier corresponding to the one of the long call and short put index options contract.
7. The method of claim 6, wherein the amount of cash further comprises accrued interest.
8. The computer implemented method of claim 1, wherein the one or more derivative financial instruments comprises:
a short index futures contract.
9. The computer implemented method of claim 8, wherein the amount of cash is determined by the mark price for the short index futures contract on the date of creation of the Index Participation Notes multiplied by a contract multiplier minus an amount of cash equal to a difference between a current mark price and the mark price at the time of formation of the creation unit multiplied by the contract multiplier.
10. The method of claim 9, wherein the amount of cash further comprises accrued interest.
11. The computer implemented method of claim 1, wherein the one or more derivative financial instruments comprises:
a long put index options contract; and
a short call index options contract, wherein the long put index options contract and the short call index options contracts have the same initial strike price and the same expiration date.
12. The computer implemented method of claim 11, wherein the amount of cash is determined by the initial strike price multiplied by a contract multiplier.
13. The method of claim 12, wherein the amount of cash further comprises accrued interest.
14. The computer implemented method of claim 1, wherein the one or more derivative financial instruments comprises a plurality of derivative financial instruments and the plurality of derivative financial instruments comprises a plurality of long index futures contracts, each of the plurality of long index futures contracts having the same initial mark price; and the Index Participation Notes are further secured by an amount of cash substantially equal to a mark price for one of the plurality of long index futures contracts.
15. The computer implemented method of claim 14, wherein the amount of cash is determined by the initial mark price for one of the plurality of long index futures contracts multiplied by a contract multiplier plus a cash amount equal to a difference between a current mark price and the initial mark price multiplied by a gains multiplier where the gains multiplier is based on multiplying the contract multiplier by a number of index futures contracts included in the plurality of long index futures contracts.
16. The method of claim 15, wherein the amount of cash further comprises accrued interest.
17. The computer implemented method of claim 1, wherein the one or more derivative financial instruments comprises:
a plurality of long call index options contracts, each of the plurality of long call index options contracts having the same strike price;
a plurality of short put index options contracts, each of the plurality of short put index options contracts having the same strike price with the plurality of long call index options contracts and the plurality of short put index options contracts having the same initial strike price and the same expiration date with the amount of cash being substantially equal to the strike price.
18. The computer implemented method of claim 17, wherein the amount of cash is determined by the strike price multiplied by a contract multiplier.
19. The method of claim 18, wherein the amount of cash further comprises accrued interest.
20. The computer implemented method of claim 1, wherein the one or more derivative financial instruments comprises:
a short call options contract.
21. The computer implemented method of claim 20, wherein the amount of cash is determined by a current mark price for the long index futures contract on the date of receipt of the redemption request multiplied by a contract multiplier.
22. The method of claim 21, wherein the amount of cash further comprises accrued interest.
23. The computer implemented method of claim 1, wherein the one or more derivative financial instruments comprises:
a long call index futures contract; and
24. The computer implemented method of claim 23, wherein the amount of cash comprises an amount based on the initial strike price of one of the long call, short call, and short put index options contracts multiplied by a contract multiplier.
25. The method of claim 24, wherein the amount of cash further comprises accrued interest.
26. The computer implemented method of claim 1, wherein the one or more derivative financial instruments comprises:
a long put index options contract, with the long put index options contract and the long index futures contract each having the same initial mark price and expiration date.
27. The computer implemented method of claim 26, wherein the amount of cash is determined by a current mark price for the long index futures contract on the date of receipt of the redemption request multiplied by a contract multiplier.
28. The method of claim 27, wherein the amount of cash further comprises accrued interest.
receive information related to receipt of a redemption request to redeem one or more creation unit size aggregations of Index Participation Notes from a holder of one or more creation unit size aggregations of Index Participation Notes that are secured by one or more derivative financial instruments on a financial index and an amount of cash substantially equal to a mark price for one of the one or more derivative financial instruments at a time of generation of the Index Participation Notes;
receive changes to the mark price of the one or more derivative financial instruments; and
calculate, based at least in part on the changes to the mark price of the one or more derivative financial instruments over a period between issuance of the one or more derivative financial instruments and receipt of the redemption request, an amount of cash to deliver along with the one or more derivative financial instruments of the financial index included in the creation unit to the holder of the Index Participation Notes in exchange for the creation unit size aggregations of Index Participation Notes.
30. The system of claim 29, wherein the one or more derivative financial instruments comprises a plurality of long index futures contracts, each of the plurality of long index futures contracts having the same initial mark price and the Index Participation Notes are further secured by an amount of cash about equal to an initial mark price for one of the plurality of long index futures contracts at the time of generation of the Index Participation Notes.
31. The system of claim 30, wherein the computing device is further configured to:
determine an initial value of the cash by multiplying the initial mark price for one of the plurality of long index futures contract by a contract multiplier;
multiply the contract multiplier by a number of index futures contracts included in the plurality of long index futures contracts to generate a gains multiplier;
add an amount equal to a difference between a current mark price and the initial mark price multiplied by the gains multiplier to the initial value of the cash.
32. A computer program product having computer instructions stored on a computer readable storage device, the computer instructions for causing a processor to:
receive information related to receipt of a redemption request to redeem one or more creation unit size aggregations of Index Participation Notes from a holder of one or more creation unit size aggregations of Index Participation Notes that are secured by one or more derivative financial instruments on a financial index and an amount of cash substantially equal to a mark price for one of the one or more derivative financial instruments at a time of generation of the Index Participation Notes, with the redemption request being received on a date that is prior to a settlement date of the one or more derivative financial instruments;
calculate based at least in part on changes to the mark price of the one of the one or more derivative financial instruments over a period between issuance of the one of the one or more derivative financial instruments and receipt of the redemption request, an amount of cash to deliver along with the one or more derivative financial instruments of the financial index included in the creation unit to the holder of the Index Participation Notes in exchange for the creation unit size aggregations of Index Participation Notes.
the one or more derivative financial instruments comprises a plurality of long index futures contracts, each of the plurality of long index futures contracts having the same initial mark price; and
the Index Participation Notes are further secured by an amount of cash substantially equal to a strike price for one of the plurality of long index futures contracts.
34. The computer program product of claim 33, wherein the computer program product further comprises instructions for causing a processor to:
multiply the contract multiplier by the number of index futures contracts included in the plurality of long index futures contracts to generate a gains multiplier;
the one or more derivative financial instruments comprises:
a short put index options contract with the long call index options contract and the short index put options contract having the same initial strike price and the same expiration date; and
the computing device is further configured to calculate the amount of cash by determining the initial strike price of one of the long call and short put index options contracts multiplied by a contract multiplier corresponding to the one of the long call and short put index options contract.
a short call index options contract, wherein the long put index options contract and the short call index options contracts have the same initial strike price and the same expiration date; and
the computing device is further configured to calculate the amount of cash by determining the initial strike price multiplied by a contract multiplier.
the one or more derivative financial instruments comprises a plurality of derivative instruments and the plurality of derivative instruments comprises a plurality of long index futures contracts, each of the plurality of long index futures contracts having the same initial mark price; and the Index Participation Notes are further secured by an amount of cash substantially equal to a mark price for one of the plurality of long index futures contracts; and
the computing device is further configured to calculate the amount of cash by determining the initial mark price for one of the plurality of long index futures contracts multiplied by a contract multiplier plus a cash amount equal to a difference between a current mark price and the initial mark price multiplied by a gains multiplier where the gains multiplier is based on multiplying the contract multiplier by a number of index futures contracts included in the plurality of long index futures contracts.
the plurality of derivative financial instruments comprises:
a plurality of short put index options contracts, each of the plurality of short put index options contracts having the same strike price with the plurality of long call index options contracts and the plurality of short put index options contracts having the same initial strike price and the same expiration date, with the amount of cash being substantially equal to the strike price; and
the computing device is further configured to calculate the amount of cash by determining the strike price multiplied by a contract multiplier.
a short call options contract; and
the computing device is further configured to calculate the amount of cash by determining a current mark price for the long index futures contract on the date of receipt of the redemption request multiplied by a contract multiplier.
a long put index options contract, with the long put index options contract and the long index futures contract each having the same initial mark price and expiration date; and
41. The computer program product of claim 32, wherein:
the computer instructions stored on the computer readable storage device further comprise instructions for causing a computer to calculate the amount of cash by determining the initial strike price of one of the long call and short put index options contracts multiplied by a contract multiplier corresponding to the one of the long call and short put index options contract.
42. The computer program product of claim 32, wherein:
the computer instructions stored on the computer readable storage device further comprise instructions for causing a computer to calculate the amount of cash by determining the initial strike price multiplied by a contract multiplier.
43. The computer program product of claim 32, wherein:
the computer instructions stored on the computer readable storage device further comprise instructions for causing a computer to calculate the amount of cash by determining the initial mark price for one of the plurality of long index futures contracts multiplied by a contract multiplier plus a cash amount equal to a difference between a current mark price and the initial mark price multiplied by a gains multiplier where the gains multiplier is based on multiplying the contract multiplier by a number of index futures contracts included in the plurality of long index futures contracts.
44. The computer program product of claim 32, wherein:
the computer instructions stored on the computer readable storage device further comprise instructions for causing a computer to calculate the amount of cash by determining the strike price multiplied by a contract multiplier.
45. The computer program product of claim 32, wherein:
the computer instructions stored on the computer readable storage device further comprise instructions for causing a computer to calculate the amount of cash by determining a current mark price for the long index futures contract on the date of receipt of the redemption request multiplied by a contract multiplier.
46. The computer program product of claim 32, wherein:
the computer instructions stored on the computer readable storage device further comprise instructions for causing a computer to calculate the amount of cash by determining a current mark price for the long index futures contract on the date of receipt of the redemption request multiplied by a contract multiplier. Description
This application claims priority from and incorporates herein. U.S. Provisional Application No. 60/794,481, filed Apr. 24, 2006, and titled �TRADEABLE INDEX CERTIFICATES�.
BACKGROUND Index funds allow an investor to invest in a single investment instrument that tracks the performance of a portfolio of investments. In general, an index fund issues shares that represent a fractional interest in a portfolio of investments, which are weighted similarly to those portfolio of investments as weighted for a published securities index, e.g., stock index, in order to mirror, track, or generally correspond, to the price and/or yield performance of the stock index.
Securities, like SPDRs, may trade on a stock exchange, a securities market or an electronic communication network. The price of such securities during intra-day trading is determined by supply and demand. In particular, depository receipts issued by the SPDR Trust may foe generated or redeemed on any business day at the next calculated net asset value (NAV), but only in �creation units� of 50,000 SPDR shares. SPDR creation units are generated or redeemed through an in-kind transfer of the basket of stocks that correspond to the stocks listed in the S&P 500 Index. Although the NAV of the SPDR Trust is only published at the close of every business day, the value of the corresponding S&P 500 index is published continuously throughout each trading day and distributed electronically to brokers and dealers throughout the world. Similarly, a number corresponding to the intra-day value of each SPDR share, based on the most recently traded prices of the stocks of the S&P 500 index in the current day's SPDR creation unit, is ordinarily published at 15 second intervals throughout the trading day.
Index futures contracts and index options provide other techniques for investors to invest, trade, or hedge based on the performance of an index. An index futures contract is a futures contract on a financial index such as the S&P 500 index, whereas index options are instruments that give the holder the right to receive cash settlements based on changes in the underlying index on which the option is based. A call index option would ordinarily give a payout if the index rises above its strike price, whereas a put index option would give a payout it the index falls, below its strike price.
SUMMARY According to an aspect of the present invention, a computer implemented method of redeeming Index Participation Notes includes receiving a redemption request from a holder of one or more creation unit size aggregations of Index Participation Notes that are secured by one or more derivative instruments on a financial index. The method also includes determining by the computer system an amount of cash to deliver along with the one or more derivative instruments of the financial index included in the creation unit to the holder of the plurality of Index Participation Notes in exchange for the creation unit size aggregation of Index Participation Notes.
The one or more derivative instruments can be a long index futures contract having an initial mark price on the issue date of the futures contract and having a contract multiplier. Determining the amount of cash can include multiplying a current mark price for the long index futures contract on the date or receipt of the redemption request by the contract multiplier. Determining the amount of cash can also include adding accrued interest.
The one or more derivative instruments can be a long cell index options contract and a short put index options contract with the long call index options contract and the short index put options contract having the same initial strike price and the same expiration date. Determining the amount of cash can include multiplying the initial strike price of one of the long call and short put index options contracts by the contract multiplier. Determining the amount of cash can also include adding accrued interest.
The one or more derivative instruments can include a short index futures contract. Determining the amount of cash can include determining an initial amount of cash by multiplying a mark price for the short index futures contract on the date of creation of the Index Participation Notes by a contract multiplier and subtracting an amount equal to a difference between a current mark price and the initial mark price from the determined initial amount of cash. Determining the amount of cash can also include adding accrued interest.
The one or more derivative instruments can include a long put index option and a short call index option. The long put index options contract and the short call index options contracts can have the same initial strike price and the name expiration date. Determining the amount of cash can include multiplying the initial strike price of one of the short call and long pot index options contracts by the contract multiplier. Determining the amount of cash can also include adding accrued interest.
The plurality of financial instruments can include a plurality of long index futures contracts, each of the plurality of long index futures contracts having the same initial mark price. The Index Participation Notes can be further secured by an amount of cash about equal to a strike price for one of the plurality of long index futures contracts. Determining the amount of cash can include determining a initial value of the cash by multiplying the strike price for one of the plurality of long index futures contract by a contract multiplier, multiplying the contract multiplier by the number of index futures contracts included in the plurality of long index futures contracts to generate a gains multiplier, and adding an amount equal to a difference between a current mark price and the initial mark price multiplied by the gains multiplier to the initial value of the cash. Determining the amount of cash can also include adding accrued interest.
The plurality of financial instruments can include a plurality of long call index options contracts, each of the plurality of long call index options contracts having the same strike price and a plurality of short put index options contracts, each of the plurality of short put index options contracts having the same strike price. The plurality of long call index options contracts and the plurality of short put index options contracts can have the same initial strike price and the same expiration date. The Index Participation Notes can be further secured by an amount of cash about equal to a strike price for one of the plurality of long call index options contracts and the plurality of short put index options contracts. Determining the amount of cash can include multiplying the strike price for one of the plurality of long call index options contracts and the plurality of short put index options contracts by a contract multiplier. Determining the amount of cash can also include adding accrued interest.
The one or more derivative instruments can include a long index futures contract and a short call options contract. Determining the amount of cash can include multiplying a current mark price for the long index futures contract on the date of receipt of the redemption request by a contract multiplier. Determining the amount of cash further can also include adding accrued interest.
The one or more derivative instruments can include a long call index options contract, a short put index options contract, the long call index options contract and the short out index options contract having the same initial strike price and the same expiration date, and a short call options contract. Determining the amount of cash can include multiplying the initial strike price of one of the long call, short call, and short put index options contracts by a contract multiplier. Determining the amount of cash can also include adding accrued interest.
The one or more derivative instruments can include a long index futures contract and a long put index options contract, with the long put index options contract and the long index futures contract each having the same initial mark price and expiration date. Determining the amount of cash can include multiplying a current mark price for the long index futures contract on the date of receipt of the redemption request by a contract multiplier. Determining the amount of cash can also include adding accrued interest.
The issuer holds derivative instruments and cash in a custody account and issues the tradable index shares representing a fractional interest in the value of the custody account. By securitizing tradable index shares with a derivative, several advantages are provided such as reducing transaction costs involved with redemption of the tradable index shares for a creation unit, since the issuer need deliver a determined amount of cash along with the derivative instruments of the financial index included in the creation unit to the holder in exchange for the creation unit site aggregations of the tradable index shares. This avoids the transaction costs associated with custody of the underlying products, e.g., securities that make up the index.
FIG. 13 is a block diagram, of a creation unit and multiple Index Participation Notes.
FIG. 14 is a block, diagram of a creation unit and multiple Index Participation Notes.
FIG. 17A is a diagram of changes in the value or an index versus time.
DESCRIPTION Referring to FIG. 1A, a computer system 10 includes software to assist with creation and issuance 12 a, administration 12 b, redemption 12 c and trading 12 d of Index Participation Notes. Although a single computer system 10 is shown, typically many such systems can be used and indeed each of the software processes can be performed on different computers, controlled by or managed by different entities that, are involved in any of the aspects of the Index Participation Notes.
The creation unit is held by the Index Participation Note issuer and includes combination, of cash and derivative positions that backs the Index Participation Notes. The Index Participation Notes represent fractional interests in the creation unit.
As will be described below, various types of Index Participation Notes are possible. Therefore, fields can be included in the representation of the Index Participation. Notes for identifying the types of notes and whether the note roil, over or are cashed out at maturity and so forth.
In one embodiment, the Index Participation Notes 22 are based on a derivative that is an index futures contract on the index which the Index Participation Note tracks. The Index Participation Note issuer may charge a fee which could be included at issuance, redemption, or during the interim between issuance and redemption of the Index Participation Notes 22. If a fee is charged at issuance, the Index Participation Note issuer adds the fee to the price of the Index Participation Notes. On the other hand, if a fee is charged at redemption, the Index Participation Note issuer subtracts the fee from the determined total value of the investor's Index Participation Notes on the redemption note,
Referring to FIG. 2, one embodiment of too Index Participation Notes 22 represents a fractional interest in a creation unit 20 that includes both an index futures contract 24 and a defined amount of cash 26. Each creation, unit 20 is divided into a predefined number of Index Participation Notes 22. For example, creation unit 20 can be partitioned into �N� Index Participation Notes 22, such that each Index Participation Note 22 represents a 1/Nth ownership interest in the index futures contract 24 and 1/Nth ownership interest in the cash 26 included in the creation unit 20.
The index futures contract 24 included in the creation unit 20 is a long index futures contract position. On index futures contract position, is a futures contract based on an index. One exemplary type of index is a financial index such as the NASDAQ-100� or S&P 500�. Another exemplary type of index is a commodities index. Index futures contracts are contractual agreements to make or receive cash payments that are economically equivalent to buying or selling a particular index-based financial instrument at a pre-determined price in the future. In the case of an index futures contract 18, the predetermined price is the price of the index at a particular date specified by the index futures contract 24 (referred to as the settlement date).
The amount of cash 26 included in the creation unit 20 varies over time as the value (e.g., the mark price) of the index futures contract 24 changes. The computer executing the creation process (or another processing device) computes the initial amount of cash 26 to be placed, in the creation unit, tracks changes in the value of the cash 20, and provides up-to-date summaries of the value of the cash 26 included in the creation unit 20. As index futures contracts are cash settled contracts (as opposed to commodity futures contracts which can be settled by delivery/acceptance of delivery of the underlying security or commodity), the index futures contract 24 settles by a cash amount which is economically equivalent to the value of the index on the maturity date of the contract times the contract multiplier that scales the sire of the contract relative to the value of the index. Thus the computer calculates the value of the cash 26 on any particular date prior to settlement by multiplying the last futures-mark-price for index futures contract 24 by its contract multiplier established on the day of creation of the Index Participation Notes 22. If the cash 26 is held, in an interest bearing account, the computer also tracks the changes in the total value of the cash 26 in the creation unit 20 on any day after creation to reflect principal value (as described above) plus accrued, interest.
Referring to FIG. 3, in order to facilitate creation of Index Participation Notes 22, futures positions are established between a contra-party 31 and the Index Participation Note-requestor using a clearing house 30. The Index Participation Note requestor establishes a long index futures contract position 24 while the contra-party 31 establishes a short index futures contract position 32. Since the long and short positions are used to determine future credits/debits, no money (other than applicable fees) is exchanged between the clearing house 30 and the Index Participation Note requestor during formation of the long and short index futures contract positions 24 and 32. Both the long and short index futures contract positions 24 and 32 are established based on a �mark price� for the index future on the day the contracts 24 and 32 are formed. Money is subsequently exchanged between the contra-party 31 and the Index Participation Note requestor based on differences between the nark price established on the day of issuance of the index futures contract and the current mark price for the index futures contract (as indicated by arrows 36 and described below in relation to FIGS. 5 and 6). Any changes to the mark price (and therefore to the value of the cash 26 in creation unit 20) are tracked by the computer system such that an accurate value for the cash 26 can be known and reported.
After the futures positions 24 and 32 have been established between the contra-party 31 and the Index Participation Note requestor, the Index Participation Note requestor requests to generate a creation unit of Index Participation Notes with the Index Participation Note issue who produces a creation unit 20. As described above, the creation unit 20 holds the index futures contract 24 and a predefined amount of cash 20. The amount of cash 26 included in the creation unit 20 varies based on the market conditions at the time of formation of the creation unit 20. In general, the amount of cash 20 in the creation unit equals the last futures �mark price� for the index future 24 multiplied by the contract multiplier for the futures contract. An example of the contents of an exemplary creation unit 20 is provided below.
In the following example, the Index Participation Notes 22 represent a fractional interest in a creation unit 20 based on the S&P 500 Index�. At the time of establishment of the creation unit, the SIP 500 Index� has the following market conditions:
Based on these market conditions, a creation unit 20 would include, an S&P 500 index futures contract long position and cash in an amount equal to the S&P 500 index future contract's last �futures-mark-price� times the index's contract multiplier as they exist on the day of formation of the creation unit 20. In this example, the mark price is $1200 and the contract multiplier for the S&P 500 index future is 250. Thus, the creation unit 20 could be represented, as follows:
One Creation Unit=1 Open Long Index Futures Contract Positions+(Contract's Last Futures-Mark-Price)*(S&P 508 Contract Multiplier)
Thus, the market price of the Index Participation Note 21 is initially related to the futures mark to market price of the index on the day of formation. For example, based on the exemplary market conditions for the S&P 500 Index Participation Notes described above if each Index Participation Note 22 had a value of 1/10 of the futures price, the price of the Index Participation dots would be $120 (e.g., the last future mark price of $1200 divided by 10). Thus, there would be 2500 Index Participation Notes 22 generated based on the creation unit 20.
After purchasing of the Index Participation Note 22 from the Index Participation Note issuer, the Index Participation Note 22 can be traded using an exchange, a securities market, an electronic communication network (ECU) and other trading venues. In order to facilitate open trading of the Index Participation Notes 22, the Index Participation Notes 22 can be listed and traded like ordinary shares of stock or exchange traded funds (ETFs) on one or more securities exchanges, markets and/or through the matching facilities of one or more electronic communication networks (ECNS). Secondary market trading of Index Participation Notes 22 will be at prices governed by competitive supply and demand forces taking into consideration, among other factors, the values of the index futures contract 18, cash 26 and value of the index that the Index Participation Notes 22 represent. Since the Index Participation Notes 22 would be registered and traded in a manner similar to traditional stocks on a national securities exchange, the Index Participation Notes 22 will be available to be traded and held through any ordinary stock brokerage account and handled by any one of the Registered Representatives in the United States today.
As described above, the Index Participation Note issuer holds the futures contract 24 and cash in a custody account and issues Index Participation Notes 22 representing a fractional interest in the value of the custody account, hence the futures contract 24 is held by the Index Participation Note issuer in a custody account (as opposed to being held by the investors), the ownership of the futures contract 24 does not change as the Index Participation Notes 22 are traded. This provides various advantages such as, for example, reducing transaction costs involved with purchasing and trading the Index Participation Notes 22. In addition, since there is no trading of the index futures contract 24 at the index Participation Note investor level (e.g., by Index Participation Note investors), the Index Participation Notes 22 can be traded on a securities exchange.
In addition to reducing the transaction costs for the investors, the transaction costs can also be reduced for the Index Participation Note issuer and thus to IP note holders. For example, rather than purchasing each of the underlying securities that make up the index, the Index Participation Note issuer needs only to purchase the index futures contract 24 for the index. By reducing the number of transactions necessary to generate a creation unit 20 (e.g., a single transaction to purchase the index futures contract 24 versus multiple transactions to purchase each of the securities in the index), the transaction, costs for the Index Participation Note issuer are reduced.
Referring to FIG. 4, in an illustrative non-limiting example, the value of an index fund (represented by line 70) closely tracks the value of the stocks included in the index fund (represented by line 72) because the index fund is comprised of a basket of stocks which track, resemble or replicate the stocks underlying the index. It is believed that the intra-day and day-to-day market value of Index Participation Notes 22 will in general closely track the pro-rata value per note outstanding of the Index Participation Note custody account which holds the index futures contract 24 and cash 26 hold by the Index Participation Note issuer.
Put another way, the value of the index Participation Notes 22 (represented by line 76) is expected to track the price of the index futures contracts (represented by line 74). The tracking between the value of the Index Participation Notes 22 and the value of the index futures contract 24 is based on the inclusion of both the index futures contract 24 and the cash 26 in each creation unit 20 for the Index Participation Notes 22. Since the cash 26 included in the creation units 20 varies based on the creation of the index futures contract 18, the value of the creation unit 20 (and therefore the value of the Index Participation Note 22) will vary based on the performance of the index futures contract 18.
As stated above the value of the Index Participation Notes 22 will track, the value of the index futures contract 18. However, because the theoretical value of an index futures contract 24 includes two components, namely �spot value� plus �carry value,� initially, the index futures contract 18, and therefore the Index Participation Notes 22, will closely track movements of the index but will diverge in absolute value to the extent of the carry value. The spot value of the index futures contract is the cash price required to acquire the underlying stocks and the carry value of the index futures contract is the expected cost to hold an ownership interest in the underlying stocks until the settlement date 86. The spot value for the index futures contract will closely track the value of the index while the carry value will vary based on interest rates reflecting the purchase price of the underlying index stocks and the dividend yield on the index stocks held through settlement date. As the settlement date nears, the carry value for the index futures contract 24 approaches zero such that the value of the Index Participation Note 22 converges to the value of the underlying index as the index futures contract which itself converges to the underlying index.
With this arrangement the Index Participation Note 22 backed by the long index futures contract and the long cash position is economically equivalent to being long the basket of stocks included in the index. More particularly, since the Index Participation Notes 22 correspond in value to long positions in both cash 26 and the index futures contract 18, held in the Index Participation Note issuer's custody account, the value of the Index Participation Notes 22 on the settlement date 86 will converge to the value of the underlying index. Accordingly, as shown in FIG. 4, the value of the Index Participation. Notes 22 (represented by line 76) and the value of the index (represented by line 70) converge to the same price 78 on the settlement date 86. Thus, the position claimed by the Index Participation Notes 22 (i.e., long cash and long an index futures contract) has the same economic value as owning the underlying stocks on the settlement date 86.
The initial mark price for the index futures contract, is subsequently updated at predetermined time intervals (e.g., the close of each daily trading session). After the mark price has been updated, the computer stores the new mark price and compares the new mark price to the previous mark price (104) to determine if there has been a change. If there is a difference between the current and previous mark prices, the accounts of the long position holder and short position holder of the futures contracts are adjusted based on the difference (106).
Since the Index Participation Note issuer holds a long index futures contract 24, if the mark, price increases, the difference between the two mark prices (e.g., a positive value) will be credited to the Index Participation Note issuer's account at the clearing house 30 and the difference between the two mark prices will be debited from the account of the contra-party 31 that holds the short index futures contract position. In contrast, if the mark price decreases, the difference between the two mark prices will be debited from the Index Participation Note issuer's account and the difference between the two mark prices will be credited to the account, of the contra-party 31.
The intrinsic value of the Index Participation Note 22 will increase when the mark price for the index futures contract 24 rises and will, decrease when the mark price for the index futures contract 24 falls. All changes in the value of creation unit 20 (e.g., changes in the value of the cash 20) are tracked by the computer system.
After the accounts of the Index Participation Note issuer and the contra-party 31 have been adjusted or if no adjustment is needed, the computer system determines if the current date is equal to the settlement date for the index futures contract 24 (110). If the date is not the settlement date, the determination of change in mark price and adjustment of the accounts is repeated. It the date is the settlement date, the positions of the Index Participation Note holders are settled based on the change in value of the Index Participation Note 22 (112).
Referring to FIG. 6, exemplary adjustments to the contents of a creation unit 20 (represented in column 126) based on the changes in the mark price (shown in columns 122 and 124) for the underlying index futures contract 24 are shown. On the date of issue of the index futures contract 18, an initial mark price is established. As shown in row 128, on the date of issue (T), the mark price 122 for the index futures contract is $100. In this example, the index multiplier for the index future is assumed to be one-hundred for ease of explanation. As such, the contents of the creation unit 20 upon, establishment include the index futures contract 24 and the defined cash 26 amount that equals the index futures contracts' strike price multiplied by the contract multiplier. As shown in row 130, on the day following the date of issue (T+1), the mark price 122 for the index futures contract has increased to $101. Thus, the change in the mark price 124 is +1 and the amount of cash in the creation unit 20 increases by $100 to $10,100. As shown in row 132, on the following day (T+2), the mark price for the index futures contract has decreased to $98. Thus, the change in the mark price 124 is −3 and the amount of cash in the creation unit 20 decreases by $300 to $9,800. Such adjustments continue until the date of settlement of the index futures contract 18.
Referring now to FIG. 7, the contents of the creation unit, and thus the value of each index Participation Note, are adjusted based on accrued interest on the cash 26 held in the creation unit 20. For example, the cash 26 included, in the creation unit 20 could be held in treasurer's notes or an interest bearing account, or other type of interest, bearing instrument including the clearing member's interest bearing account at the clearing house. The interest earned is credited to the value of the creation unit 20. If the cash 26 is held in an interest bearing account, the value of the cash 26 increases over time. In order to accurately assess the value of the Index Participation Notes 22, a computer maintains an accurate representation of the value of the index futures contract 24 and the value of the cash 26 (including both adjustments based on the performance of the futures contract and based on the accrued interest).
A computer implemented process 140 for reporting the current value of a creation unit 20 includes using a computer system to determine adjustments to the cash 26 based on the accrued interest since the previous reporting period, for example, the accrued interest since the previous day (142). The computer system also determines adjustments to the cash 26 based on differences between the current mark price and the previous mark price (114). After determining both the adjustment to the cash 26 based on the performance and the interest, the computer system provides the necessary information for the Index Participation Note issuer to publish the contents of the creation unit 20 to reflect the current value of the cash 26 included, in the creation unit 20 (144).
The value of the creation unit 20 on any given day is primarily the value of the cash 26 included in the creation unit. The relative proportion of value of the index futures contract 24 to the cash 26 included in the creation, unit 20 is low. The majority of the value of the creation unit 20 is cash 26 because the index futures contract 24 simply adjusts the total amount of cash 26 by incremental amounts on a day-to-day basis. Thus, the value of the index futures contract 24 in the creation unit 20 is effectively converted to a cash amount (e.g., the adjustment based on the mark price) each day. Since the value of the creation unit 20 and, thus, the Index Participation Notes 22, is primarily based on the cash 26 included in the creation unit 20, and a financial claim on cash is a security and not a commodity, the Index Participation Notes 22 are securities that can be traded on a securities market.
Redemption/Settlement of Index Participation Abates
A computer system calculates the final value of the Index Participation Notes 22 based on the mark price for the futures contract 24 on the settlement date and any interest accrued, on the cash 26 in the creation unit 20. As such, the final value calculated by the computer system, reflects any stances in the mark price between issuance and redemption of the futures contract 18 c and reflects the interest gained on the cash 20.
The Index Participation Note issuer may charge a fee for redemption of the Index Participation Notes 22. If a fee is charged, for redemption, the computer system subtracts the fee from the determined total value of the investor's Index Participation Notes (158). The Index Participation Note issuer transfers the value of the investor's Index Participation Notes less any fees to the investor (160).
Referring to FIG. 9, another embodiment, of the Index Participation Note 22 is one in which the term of the Index Participation Note 22 is variable. For a variable term Index Participation Note 22, the holders of the Index Participation Notes 22 may exercise a periodic, e.g., quarterly cash-out feature. Any remaining, non-exercised Index Participation Notes 22 would be subject to automatic roll-forward of expiring futures contracts. With this toll-forwarding the Index Participation Note-issuer generates a new creation, unit of future-dated, futures contracts. The Index Participation Note issuer rolls-forward the interest of the non-exercising Index Participation Note holders by issuing new Index Participation Notes to them based on the new creation unit. The Index Participation Note issuer uses a computer system to track the contents of the creation unit 20 before and after the Index Participation Notes 22 are rolled-forward.
Referring now to FIG. 9, a process 190 for settlement of variable term. Index Participation Notes 22 is shown. On the settlement date for the index futures contract 18, the Index Participation Note issuer uses a computer to determine the value of each Index Participation Note 22 (196). The Index Participation Note issuer determines, based on rules, a new, one or more future-dated index futures contracts to include in a new creation unit based on the index (198) and goes into the market to secure those contacts following non-discretionally execution.
If the Index Participation Note holder has not exercised the cash-out option and the Index Participation Notes are all variable temp the Index Participation Note issuer uses a computer system to calculate a total value of the Index Participation Notes 22 held by the investor (204). The computer system determines the number of the nee Index Participation Notes that correspond to the total value of the old Index Participation Notes based on the issue price for Index Participation Notes 22 based on the new creation unit (206) and the Index Participation Note issuer issues the new Index Participation Notes 22 to the note holder.
Referring to FIG. 10, in some embodiments, an Index Participation Note holder may be able to redeem Index Participation Notes 22 from the Index Participation Note issuer prior to the settlement date based on a process 170 for redeeming creation unit-size aggregations of Index Participation Notes 22 by request of an Index Participation Note holder. If the Index Participation Note issuer allows redemption of creation unit-size aggregations of Index Participation Notes 22, the Index Participation Note issuer determines if the Index Participation Note holder owns a creation unit-site aggregation of Index Participation Notes (172).
The Index Participation Koto issuer may charge a fee for redemption of the Index Participation Notes 22 prior to the settlement date. If such a fee is charged, the computer system subtracts the fee associated with the redemption from the total cash value of the creation unit (180). Since the settlement, date of the futures contract has not yet arrived, the Index Participation Note issuer transfers the futures contract 24 in the creation unit 20 (182) and transfers the cash value less any fees (184) to the Index Participation Koto holder in exchange for the Index Participation Notes 22,
Referring to FIG. 11, in one particular exact or, the creation unit 20 includes weighted amounts of each of the S&P 500 index futures, the Nasdaq 100 index futures, and the Dow Jones Industrial Average (DJIA) futures. As shown in FIG. 11, the creation unit 20 includes one S&P 500 long index futures contract 220, one Nasdaq 100 lone index futures contract 222, and one Dow Jones Industrial Average (DJIA) long index futures contract 224. The creation unit also includes a predetermined amount of cash 226. Upon formation of the creation unit 20, the value of the cash 225 would foe a sum of the initial mark price for the S&P 500 long index futures contract 220, the initial mark price for Nasdaq 100 long index futures contract 222, and the initial mark price for Dow Jones Industrial Average (DJIA) long index futures contract 224. Upon settlement, the value of the creation unit 20 will converge to the sum of the value of the S&P 500, Nasdaq 100, and DJIA, after accounting for index multipliers in the creation unit and accrued interest on the cash held in the creation unit.
Referring to FIG. 12, an alternative embodiment of a creation unit 244 includes multiple index futures contracts (e.g., long index futures contract 240 and long index futures contract 242) based on the same index. The amount of cash is equal to the mark price of a single futures contract. For example, if long index futures contracts 240 and 242 each have a mark price of $1500, upon generation of the creation unit 244 the amount of cash 242 would be $1500. Including multiple index futures contracts 240 and 242 in the creation unit 244 increases the leverage of the Index Participation Note 246 by magnifying the position taken by the long index futures contract. For example, with the single index futures contract embodiment described above, the resulting creation unit is based on a single futures contract and the mark price of the single contract and when the value of the index futures increases by 1% the value of the Index Participation Notes 22 increases by 1%. Whereas, when the creation unit 244 includes two long index futures contracts 240 and 242 and the cash 242 in the creation unit 244 is equal to the mark price of one of the two index futures contracts, ones the value of the index futures increases by 1% the value of the Index Participation Notes 246 increases by about 2% (correspondingly when the value fails by 1% for the futures contract the value falls by about 2% for the Index Participation Note 246). Thus, the number of long futures contracts included in the creation unit 244 serves as a multiplier to the gains/losses incurred by the magnified Index Participation Notes 246.
The number of index futures contracts in the creation unit 214 for the magnified Index Participation Notes 246 can vary. For example, the Index Participation Note issuer could issue magnified Index Participation Notes 216 with between two and ten index futures contracts included in the creation unit 244. If the creation unit 244 includes ten long index futures contracts, a one percent increase in the value of the futures contract would generate a corresponding ten percent increase in the value of the magnified Index Participation Notes 246.
If the Index Participation Notes 22 are trading at a premium to the futures contracts 18, the arbitrageur can make money using a creation arbitrage scenario. For example, if Index Participation Notes with a 2006 settlement date are trading at a premium to the index futures with the same settlement date an arbitrage scenario exists. The arbitrageur sells one creation unit worth of 2006 Index Participation Notes at the premium price on a stock exchange and buys one futures contract at the discount price to lock in the price differential. The arbitrageur requests a creation of one creation unit, of newly-issued 2006 Index Participation Notes from the Index Participation Note-issuer and delivers out (via clearing house transfer) an open futures position plus cash to the Index Participation Note-issuer. The arbitrageur receives one creation unit of 2006 Index Participation Notes from the Index Participation Note-issuer to cover the sale on the stock exchange on T+3 settlement and also receives more than enough proceeds from the sale of the Index Participation Notes on T+3 settlement to cover the cash, delivery to the Index Participation Note issuer for the creation with the excess cash proceeds corresponding to the arbitrages profit from the creation transaction. Thus, as shown above, if the Index Participation Notes are trading at a premium to the futures contracts, the arbitrageur can make money off the difference in price.
Conversely, it the Index Participation Notes are trading at a discount to the futures contracts, the arbitrageur can make money using a redemption arbitrage scenario. For example, if Index Participation Notes with a 2006 settlement date are trading at a discount to the index futures with the same settlement date, an arbitrage scenario exists. The arbitrageur buys one creation unit of the 2006 Index Participation Notes at the discount price on the stock exchange and sells one futures contract at the premium price to lock in differential. The arbitrageur requests redemption of one creation unit of the 2006 Index Participation Notes from Index Participation Note-issuer and receives in (via a clearing house transfer) an open long futures position plus more than enough cash from the Index Participation Note-issuer to cover the purchase of the Index Participation Notes, with the excess cash corresponding to the arbitrage profit from the redemption transaction. The arbitrager delivers one creation unit of 2006 Index Participation Notes to the Index Participation Note-issuer to effect the in-kind redemption of the Index Participation Notes.
Index options contracts such as the long call index option position 316 and the short put index option position 318 are call/put options based on a stock market index suet as the S&P 500� or the Nasdaq 100�, which may be European exercised (i.e., exercised on expiration) or American exercised (i.e., exercisable on or before the expiration date). In contrast to stock options, index options do not require the writer of a call option to actually deliver shares of the stocks included in the index upon exercise of the option or the put writer to actually purchase the shares of stock included in the index upon exercise of the option. Rather, the index options are based on a cash settlement procedure. The payoff that would be due if the option were exercised is calculated and, upon exercise of an option, the option writer pays the calculated amount to the holder of the option.
The lone call index option position 316 included in the creation unit 312 gives the holder of the position (e.g., the note issuer 310) the economic benefit of the amount by which the index value exceeds the strike price on the option expiration date. Thus, if the index increases in value above the strike price, the Index Participation Note increases in value. On the other hand, the short, put index option position 318 gives the holder of the short position the economic benefit of the amount by which the index value falls short of the strike price on the option expiration date. Thus, if the index decreases in value, the Index Participation Pore 310 decreases in value.
Referring to FIG. 15, in order to facilitate creation of index Participation Notes 314, long call and short put options positions 316 and 313 are established by an investor seeking to generate index Participation Notes and transferred with a requisite cash amount via a clearing house 330 to the Index Participation Note issuer 310 in exchange for the newly issued index Participation Notes. The Index Participation Note issuer 310 receives, the long call options positions 316 and the short put index options positions 318 plus cash through accounts at the clearing house 330. Thus, the Index Participation Note issuer 310 will have an increase in value in the options and cash positions it the index rises in value and wild, have a decrease in value if the index decreased in value by the expiration date.
After the options positions 316, 318, 332, and 331 and cash have been delivered via the clearing house 330 to the index Participation Note issuer 310, the Index Participation Note issuer 310 produces a creation unit 312. As described above, the creation, unit 312 holds a long, call and a short put index options positions 316 and 318 and a predefined amount of cash 320. The amount of cash 320 included in the creation unit 312 equals the strike price for the options contracts 310 and 318 multiplied by a contract multiplier (if applicable). For example, if the strike price for the long call index option position 316 is $1000 and the strike price for the short put index options contract 318 is $1000 upon formation the creation unit would include $1000 multiplied by the contract multiplier (if any) for the options contracts.
Initially, upon the first generation of particular Index Participation Notes, the Index Participation Notes are valued based on the cash amount related to the pro-rata cash 320 in the creation unit 312 and the market price of the options contracts 316 and 318 at the time of first generation of the Index Participation Notes 314 after accounting for expenses and fees. Thus, the cost of the Index Participation Note 314 is initially based on the strike price of the options contracts 316 and 318 for the index on the day of formation of the creation unit 312. If additional Index Participation Notes 314 are issued to investors 322 after the initial creation unit, a computer system calculates the amount of cash necessary to form a creation unit 312. The amount of cash will include any accrued interest such that the formation of the additional laden Participation Notes 314 does not dilute the value of the previously offered Index Participation Notes 314.
Since the creation unit 312 includes a long call option 316, a short put option 318, and a defined amount of cash 320 corresponding to the strike price of the options, the value of the Index Participation Note 314 converges to the value of the under lying index on the expiration date of the index options contracts 316 and 318. With this arrangement the investment position represented by the Index Participation Note 314 is economically equivalent to being long on the basket of stocks included in the index regardless of whether the index increases or decreases in value. In order for the value of the Index Participation Notes 314 to converge to the index on the settlement date, the strike price of the long call option 316 and the short put option 318 must be the same.
V - S if ⁢ ⁢ V > s 0 if ⁢ ⁢ V = S 0 if ⁢ ⁢ V < S where V is the value of the index at expiration of the index call option and S is the strike price for the index call option.
0 if ⁢ ⁢ V > s 0 if ⁢ ⁢ V = S S - V if ⁢ ⁢ V < S where V is the value of the index at expiration of the option and S is the strike price for the option. Since the Index Participation Note issuer 314 is short the put option, the Index Participation Note issuer 314 will be liable for pay/sent of S-V should the value of the index be less than the strike price on settlement date. Thus, the net gains/losses credited to or debited against the cash value of the creation unit are as follows:
+ ( V - S ) if ⁢ ⁢ V > s 0 if ⁢ ⁢ V = S - ( S - V ) if ⁢ ⁢ V < S . Since the creation unit 312 includes cash equal to the strike price �S�, the value of the creation unit converges to the value of the index �V.� That is, regardless or whether �V� is greater than �S,� equal to �S� or less than �S� on expiration date, the value of the account holding the long call, short put, and cash equal to the strike price equals �V� value of the index.
Referring to FIG. 16, a process 340 for issuing and redeeming Index Participation Notes based on options contracts is shown. The Index Participation Note issuer 310 receives a long index call option having a particular strike price, referred to herein as strike price �S� (342) and receives a short index put option having the same strike price �S� (344). The Index Participation Note issuer 310 also receives an amount of cash equal to the strike price �S� in the creation unit 312 (346), Since the strike prices �S� of the long call and short out options positions are the same and the creation unit 312 includes cash 320 equal to the strike price �S�, the value of the creation unit 312 converges to the value of the index on the date of expiration after accounting for the index multiplier.
As the value of the creation unit converges to the index, on the expiration date, the Index Participation Note issuer 310 uses a computer system to administer, monitor, and reconcile cash flows depending on whether the index price is greater than, equal to, or less than the strike price �S� (348). For example, if the index value is greater than the strike price on expiration date, the Index Participation Note issuer exercises the call option (350) and the put option (302) is not exercised. Conversely, if the index value is less than the strike price �S� on expiration date, the put option is exercised by its holder (354) against the Index Participation Note issuer 310 while the call option (356) is not exercised. The computer system adjusts the amount of cash included in the creation unit 312 based on the exercised options and exercised settlement values. Examples are presented, below in relation to FIGS. 17A, 17B, 18A, and 18B.
Referring to FIG. 17A, an example is depicted in which the strike price 364 a is equal to the value of the index on the issue date 306. In this example, the value of the index (represented by line 367) rises between the issue date 360 and the expiration date 368. At the expiration date 368, the value of the index is greater than the strike price of the options contract. Thus, the call option has a payout 370 a of the index value minus the strike price and the put option expires worthless (i.e., has a value of $0). Therefore, the sum of the cash 320 in the creation unit 312 (e.g., the strike price plus the payout 370 a from the call option) converges to the value of the index upon settlement.
Referring to FIG. 18A, in this example the strike price 384 a is different from the value of the index 386 a on the issue date 366. In this example the value of the index (represented by line 36 d) rises between the issue date 366 and the settlement date 368. At the settlement date 368, the strike price 384 a of the options contracts is less than the value of the index 362 a. Thus, the put option expires worthless and has a value of $0 (and thus the Index Participation Note issuer 310 as the seller of the put option does not owe any money to the buyer) and the call option has a payout 388 a of the index value minus the strike price. Thus, the sum of the cash 320 in the creation unit 312 (e.g., the strike price plus the profit 388 a from the call option) is the value of the index 382 a. Referring to FIG. 18B, in this example the strike price 384 b is different from the value of the index 386 b on the issue date 366. In this example the value of the index (represented by line 367) decreases between the issue date 366 and the settlement date 368. At the settlement date 368, the strike price of the options contracts is greater than the value of the index 382 b. Thus, the call option expires worthless and has a payout of $0. Since the Index Participation Note issuer 310 is short the pus option, the Index Participation Note issuer pays the buyer of the option a payout 338 b equal to the strike price 384 b minus the index value 382 b. Thus, again, the sum of the cash 320 in the creation unit (e.g., the strike price minus the payout 388 b paid from the put option) converges to the value of the index 382 b on the settlement date 368.
As shown in the examples above, in order for the value of the options 316 and 318 and the cash 320 included, in creation unit 312 to converge to the value of the index on the expiration date the options have the same strike price and the amount of cash 320 included in the creation unit 312 is equal to that strike price. However, at any given time there are multiple options available on the market with the same expiration date but different strike prices.
Referring to FIG. 19, a process 390 for obtaining long call, index option contracts 316 and short put index options contracts 318 having the same strike price and settlement date is shown. The Index Participation Note issuer 310 uses a computer to obtain a list of available shrike prices for call index options 316 having a particular settlement date (392) and to obtain a list of available strike prices for put index options 318 having the same settlement date (334). The computer system determines if any of the strike prices for a long call option contract and a short put option contract are the same (396). If at least some matching strike prices are located, the computer system instructs the Index Participation Note issuer 310 to accept one or more of the matching pairs of long call and short put index options having the same strike price and the same expiration date in the creation unit in exchange for newly issued Index Participation Notes (398).
Referring to FIG. 20, an exemplary listing of strike prices for long call and short put index options is shown. The long call options (shown in column 400) include long call index options having strike prices of $800, $880, $1000, $1020, $1060, and $1200. The short put index options (shown in column 402) include short put index options hawing strike prices of $750, $800, $1000, $1020, $1150, and $1200. In order to determine the matching pairs of index options, the computer system obtains both of these lists. After analyzing the strike prices, the computer system would determine that matching pairs exist at the strike prices of $800, $1000, $1020, and $1200 (as indicated by arrows 404, 406, 408, and 410, respectively). The Index Participation Note issuer 310 receives one or more long call and short put index options pairs having the same strike price and expiration date to provide a creation unit basis for issuance of Index Participation Notes 314.
Referring to FIG. 21, a process 420 for obtaining long call index option contracts and short put index options contracts having strike prices equal to the index value at the issue date and having true same settlement date is shown. The Index Participation Note issuer 310 uses a computer system to obtain a list of available strike prices for long call index options having a particular expiration date (422) and to obtain a list of available strike prices for short put index options having the same expiration date (424). The computer system determines if any of the strike prices for the long call and short put options contracts are the same as (or within a certain percentage of) the current value of the index (426). If one or more matching pairs of long call and short put options having a strike price equal to (or about, the same as) the index value are located, the computer system instructs the Index Participation Note issuer 310 to accept at least one of the matching pair(s) of long call and short put index options (432). If such matching pairs are not located, the Index Participation Note issuer 310 announces that it will accept delivery of long call and short put options at a strike price equal to the current index value (428). The index note issuer 310 purchases one or more matching pairs of the long call and short put options (430).
Referring to FIG. 22, an exemplary listing of strike prices for long call and short put index options is shown. The long call options (shown in column 434) include long call index options having strike prices of $800, $880, $1000, $1020, $1060, and $1200. The short put index options (shown in column 436) include short put index options having strike prices of $750, $800, $1000, $1020, $1150, and $1200. If the current index value was $1000, the computer system analyzes the lists 434 and 436 and determines that a matching pair of long call and short put index options exist at a strife price equal to the value of the index, namely a strike price of $1000 (as indicated by arrow 438). The Index Participation Note issuer 310 purchases the long call and short put index options having the same strike price.
For Index Participation Notes 314 having a variable term, holders may exercise a cash-out, e.g., on a quarterly basis. If the holder of the Index Participation Notes 314 elects not to cash-out the Index Participation Notes, the Index Participation Notes 314 are automatically rolled forward into new Index Participation Notes. The new Index Participation Notes are issued through rule-driven market execution by the Index Participation Note-issuer 310. The notes approximate icy correspond in underlying notional value to the remaining aggregate cash from the liquidated Index Participation Notes held by Index Participation Note-issuer.
If the Index Participation Note holder does not own a creation unit-sire aggregation of Index Participation Notes, redemption is not feasible. In such a situation, the Index Participation Note holder can trade, i.e. sell, the Index Participation Notes 314 on an exchange, marker or other trading venue obtain a current value for the Index Participation Notes 314 prior to the settlement date.
On the other hand, if the Index Participation Note holder owns a creation unit-sire aggregation of Index Participation Notes and requests to redeem the Index Participation Notes 314 prior to settlement of the options contracts, the Index Participation Note issuer 310 uses a computer to calculate the cash value for the creation unit of Index Participation Notes 314. Since the settlement date of the long call and short put options contracts 316 and 318 has not yet arrived, the Index Participation Note issuer 310 transfers the long call and short put options contracts 316 and 318 in the creation unit 312 and the requisite cash value 320 after accounting for any fees to the Index Participation Note holder in exchange for the Index Participation Notes 314.
In one particular example, as shown in FIG. 23, the creation unit 312 could include weighted amounts of each of the S&P 500 index, the Nasdaq 100 index, and the Dow Jones Industrial Average (DJIA). The creation unit 312 includes an S&P 500 long call index option 440, an S&P 500 short put index option 442, a Nasdaq 100 long call index option 444, a Nasdaq 100 short put index option 446, a Dow Jones Industrial Average (DJIA) long call index option 448, and a DJIA short put index option 450. The creation unit 812 also includes a defined amount of cash 452. Upon formation of the creation unit 312, the value of the cash 452 would be a sum of the strike prices for the S&P 500 options, the Nasdaq 100 options, and the DJIA options after applying the respective index multipliers.
For example, if the options contracts 460, 462, 464, and 466 each have a strike price of $1500, $1500 multiplied by the index multiplier would be included as the cash 468 in the creation unit 470. These multiple index options contracts 460, 462, 464, and 466 increase the leverage of the Index Participation Note by magnifying the position taken by the opt ions contracts.
When the creation unit 470 includes two long call index options contracts 460 and 462 (in contrast to one as described above) and the cash 468 in the creation unit 470 is the strike price of a single one of the contracts, for each 1% by which the value of the index increases above the strike price by expiration date, the value of the Index Participation Notes 246 increases by about 2%. Similarly, when the creation unit includes two short put index options contracts 464 and 466 (in contrast to one as described above) and the cash 468 in the creation unit 470 is the strike price of a single one of the contracts, for each 1% by which the value of the index decreases below the strike price by expiration, date, the value of the magnified Index Participation Notes 472 decreases by about 2%. Thus, the number of long call and short put index options contracts included in the creation unit 470 serves as a multiplier to the gains/losses incurred by the magnified Index Participation Note 472.
The number of index options contracts in the creation unit 470 for the magnified Index Participation. Notes 472 can vary. Per example, the Index Participation Note issuer 310 could issue magnified Index Participation Notes 472 with between two and twenty long call and short put index options contracts included in the creation unit 470. By way of illustration, if the creation unit 470 includes ten lone call and short put options contracts, a one percent increase in the value of the index above strike price on expiration date would generate a corresponding ten percent increase (approximately) in the value of the creation unit 470 above the strike price on which the magnified Index Participation Notes 472 are based on expiration date.
In some embodiments, issuance and subsequent trading of the Index Participation Notes 314 may result in the Index Participation Notes trading at a slight premium or discount to the options contracts. When the Index Participation Notes are trading at a slight premium or discount, an arbitrageur could use the situation to arbitrage based on the premium, or discount.
If the Index Participation Notes are tracing at above the value corresponding to the current 2006 Index call options premium minus the current 2006 Index put options premium plus the cash amount equal to the options contract strife price times the contract multiplier, an opportunity for creation unit arbitrage exists. In this situation, the arbitrageur would sell one creation unit worth of 2006 Index Participation Notes at the premium price on the exchange, market or other trading venue and buy one 2006 index call option contract, and veil one 2006 index put option contract to look in the differential in the values of the Index Participation Notes and the value of the creation unit composed of the long 2006 Index call options and short 2006 Index put options.
The arbitrageur requests redemption of the creation unit aggregation of just-purchased Index Participation Notes from Index Participation Note-Issuer. The arbitrageur delivers out (via clearing house transfer) a creation unit of Index Participation Notes to the Index Participation Note-Issuer and as redemption proceeds receives one long call index option plus 1 short put index option position plus cash corresponding to the strike price (after applying the index multiplier) plus accrued interest from the Index Participation Note-Issuer to cover settlement of the options trades and Index Participation Note on appropriate settlement timeline and with net excess cash representing arbitrage profit from the redemption transact ion.
Referring to FIG. 25, while in some of the examples described above the creation unit (e.g., creation unit 312) included long call/short put index options contracts, in some embodiments, e.g., a �bear� embodiment a creation unit 486 can include a short call index option 482 and a long put index option 480 having the same strike price and expiration date. The performance of these so called �bear� Index Participation Notes 488 based on creation unit 486 will have an inverse relationship to the performance of the index. Thus, if the index decreases, the value of the bear Index Participation Notes 488 will increase, and if the index increases the value of the bear Index Participation Notes 488 wind, decrease.
The creation unit 486 also includes a defined amount of cash 484. As the value of the creation unit converges to the index, on the expiration date, the Index Participation Note issuer 310 uses a computer system to administer, monitor, and reconcile cash flows depending on whether the index price is greater than, equal to, or less than the strike price. For example, if the index value is greater than the strike price on expiration date, the Index Participation Note issuer exercises the put option and the call option is not exercised. Conversely, if the index value is greater than the strike price on expiration date, the call option is exercised by its holder while the put option is not exercised. The computer system adjusts the amount of cash included, in the creation unit based on the exercised options and exercised settlement values.
Referring to FIGS. 27A and 27B, examples of the value of the creation unit 496 versus the performance of the index (indicated by line 505), for upside participation/downside protection Index Participation Notes 496 based on a creation unit 496 that includes a long put index option 490 (or long put index futures option) and a long index futures contract 492 is shown, in this example, the strike price 502 a for the long put Index option 400 is the same as the mark price 502 a for the long index futures contract 492 on the date of generation of the creation unit 496.
In the example shown in FIG. 27A, the value of the index (represented by line 505) rises between the issue date 504 and the settlement date 506. At the settlement date 506, the strike price of the options contracts 502 a is less than the value of the index 500 a. Thus, the put option expires worthless (i.e. has a profit of $0). However, since the mark price for the long index futures 502 a is less than the value of the index 500 a, a profit 508 is gained from the long index futures contract 492. Thus, the sum of the cash 494 in the creation unit 496 (e.g., the strike price plus the profit 508 from the futures contract) is equal to the value of the index 500 a. In the example shown in FIG. 278, the value of the index (represented by line 505) falls between the issue date 504 and the settlement date 506. At the settlement date 506, the strike price 500 b of the options contract is greater than the value of the index 502 b. As such, the long put option 490 has a payout 510 of the strike price minus the index value. The futures contract has a loss equal to the strike price minus the index value. Thus, the sum of the profit from the long put option 490 and the loss from the long futures 492 is approximately zero and the value of the Index Participation Note on settlement date is equal to the strike price. As such, the upside participation/downside protection Index Participation Note 498 is shown to protect the investment of the note holder from the decrease in the value of the index below the strike price.
In the example shown in FIG. 29B, the value of the index (represented by line 552) falls between the issue date 554 and the option expiration date 556. At the expiration date 556, the strike price 550 b of the long call options contract is greater than the value of the index 502 b. As such, the long call index option expires worthless. Thus, at hive settlement date 556, the Index Participation Note has a value equal to the pro-rata share of the cash 542 included in creation unit 544 which corresponds to the strike price. The value of the Index Participation Note is not further reduced by the decrease in the value of the index, thereby providing downside protect ion.
Referring to FIG. 30, in some embodiments the index Participation Notes are buy/write Index Participation Notes 570 that provide an economic cash benefit when the underlying index increases in value but not above the strike price from the issue date to the settlement date (e.g., when the market, is �flat�). Such buy/write Index Participation Notes 570 are based on a creation unit 568 that includes a long index futures contract 562 and an amount of cash 566 equal to the mark price for the long index futures contract 562. The combination of the long index futures contract 562 and the cash 566 provides for a return corresponding to the index return (as described above). The creation unit also includes a short call index options contract 564 or short call index futures option with same strike price. When the Index Participation Note issuer writes the short call index options contract 564, the note issuer receives the options premium or proceeds from the sale to the party that purchases the long position. Thus, an economic cash benefit is made from writing the short call index options contract 564.
While in the example of a buy/write Index Participation Notes 570 described above, the creation unit included a long index futures contract 562 and a defined amount of cash 566, other positions equivalent in value to a long stock position could be substituted for the long index futures contract 562 and noticed amount of cash 566. For example, the creation unit could include a long call index options contract, a short put index options contract with a strike price different from the strike price of the short index call option or short index call, futures option, and an amount of cash equal, to the strike price of the options contracts.
As described above, the cash included in a creation unit (e.g., cash 26 in creation unit 20, cash 320 in creation unit 312) for the index Participation Notes is invested in interest bearing investments. For example, the cash can be held in U.S. Treasury bills or notes that guarantee a fixed return over a predefined period of time. The net profit of interest gained on the cash is periodically distributed to the holders of the index participation, e.g., quarterly, semi-annually, or annually. In some embodiments, the yield on cash held in U.S. Treasury hills in Issuer's Custody Account can accrue and is distributed to Index Participation Note holders on final redemption, expiration, or settlement of the Index Participation Note in lieu of quarterly stock dividends.
The system and methods described herein can be implemented in digital electronic circuitry, or in computer hardware, firmware, software, or in combinations thereof. For example, calculations of the cash value for a creation unit, the formation, of a creation, unit, the settlement processes for endow Participation Notes, etc. can occur in systems 511 as shown in FIG. 31. Generation of creation units can be implemented using any technique. Also, data structures used to represent contents of the creation units and interest participation notes can be stored in memory and in persistence storage. The Index Participation Notes can be represented by certificates or preferably as book entries in the records of an administrator or broker/dealer or clearing house or transfer agent or registrar either as manual entries or preferably as data structures in an administrator or a broker/dealer's computer systems.
Apparatus of the invention can be implemented in a computer program product tangibly embodied in a machine-readable storage device for execution by a programmable processor and method actions can be performed by a programmable processor executing a program of instructions to perform functions of the invention by operating on input data and generating output. The invention can be implemented advantageously in one or more computer programs that are executable on a programmable system including at least one programmable processor coupled to receive data and instructions from, and to transmit data and instructions to, a data storage system, at least one input device, and at least one output device. Each computer program can be implemented in a high-level procedural or object oriented programming language, or in assembly or machine language if desired, and in any case, the language can be a compiled or interpreted language, suitable processors include, by way of example, both general and special purpose microprocessors. Generally, a processor will receive instructions and data from a read-only memory and/or a random access memory. Generally, a computer will include one or more mass storage devices for storing data files, such devices include magnetic disks, such as internal hard disks and removable disks magneto-optical disks and optical disks. Storage devices suitable for tangibly embodying computer program instructions end data include all forms of non-volatile memory, including, by way of example, semiconductor memory devices, such as EPROM, EEPROM, and flash memory devices; magnetic disks such as, internal hard disks and removable disks; magneto-optical disks; and CD_ROM disks. Any of the foregoing can be supplemented by, or incorporated in, ASICs (Application-specific integrated circuits).
An example of one such type of computer is shown, in FIG. 31, which shows a block diagram of a programmable processing system (system) 511 suitable for implementing or performing the uppers rue or methods described herein. The system 511 includes a processor 520, a random access memory (RAH) 521, a program memory 522 (for example, a writeable read-only memory (ROM) such as a flash ROM), a hard drive controller 523, and an input/output (I/O) controller 524 coupled by a processor (CPU) bus 525. The system 511 can be preprogrammed, in ROM, for example, or it can be programmed (and reprogrammed) by loading a program from another source (for example, from a floppy disk, a CD-ROM, or another computer).
While embodiments have been described above in which a creation unit includes a long put index option position, in some embodiments, a long index futures option position can be substituted fox the long put index option position in a creation unit.
While embodiments have been described above in oh ion a creation unit includes a short put index option position, in some embodiments, a short put index futures option position can be substituted for the short put index option position in a creation unit.
While embodiments have been described above in which a creation unit includes a long call index option, position, in some embodiments, a long call index futures option position can be substituted for the long call index option position in a creation unit.
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