U.S. patent application number 13/072878 was filed with the patent office on 2011-12-01 for systems and methods for providing financial instruments including contrary positions.
Invention is credited to Howard W. LUTNICK.
Application Number | 20110295735 13/072878 |
Document ID | / |
Family ID | 29553073 |
Filed Date | 2011-12-01 |
United States Patent
Application |
20110295735 |
Kind Code |
A1 |
LUTNICK; Howard W. |
December 1, 2011 |
SYSTEMS AND METHODS FOR PROVIDING FINANCIAL INSTRUMENTS INCLUDING
CONTRARY POSITIONS
Abstract
A market for trading hedged instruments is provided. The market
includes at least one hedged instrument having a value based at
least on a first position on a first tradable instrument and a
second position on a second tradable instrument. The second
position is contrary to the first position.
Inventors: |
LUTNICK; Howard W.; (New
York, NY) |
Family ID: |
29553073 |
Appl. No.: |
13/072878 |
Filed: |
March 28, 2011 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
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12119604 |
May 13, 2008 |
7917424 |
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13072878 |
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10329103 |
Dec 23, 2002 |
7379911 |
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12119604 |
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60343885 |
Dec 26, 2001 |
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Current U.S.
Class: |
705/37 ;
705/35 |
Current CPC
Class: |
G06Q 40/00 20130101;
G06Q 40/04 20130101; G06Q 40/06 20130101 |
Class at
Publication: |
705/37 ;
705/35 |
International
Class: |
G06Q 40/00 20060101
G06Q040/00 |
Claims
1-40. (canceled)
41. A method for providing a hedged instrument, the method
comprising: identifying a first position on a first tradable
instrument; identifying a second position on a second tradable
instrument, the second position being contrary to the first
position; undertaking the first position and the second position;
and creating a hedged instrument including the first position and
the second position.
42. The method of claim 41, wherein identifying the first position
and the second position comprises identifying a first position and
a second position relating to the same class of instruments.
43. The method of claim 41, wherein identifying the first position
and the second position comprises identifying a first position and
a second position relating to a single tradable instrument.
44. The method of claim 41, wherein the first tradable instrument
is a derivative of the second tradable instrument.
45. The method of claim 41, further comprising selling the hedged
instrument for a price.
46. The method of claim 45, wherein the price comprises a service
fee plus the net value of the first and the second positions.
47. The method of claim 45, further comprising returning a payoff
to a buyer of the hedged instrument, the payoff based on the
combined payoffs of the first position and the second position.
48. The method of claim 41, further comprising binding a buyer of
the hedged instrument to purchase the hedged instrument without
binding the buyer of the hedged instrument to the first position or
the second position.
49. The method of claim 41, wherein: identifying a first position
on a first tradable instrument comprises identifying a long
position on a first bond; and identifying a second position on a
second tradable instrument comprises identifying a short position
on a second bond.
50. The method of claim 41, wherein: undertaking the first position
comprises buying a call option on a first share or shares of stock;
and undertaking the second position comprises selling a call option
on a second share or shares of stock.
51. The method of claim 41, wherein: the first position on the
first tradable instrument comprises a long position on a first
futures contract; and the second position on the second tradable
instrument comprises a short position on a second futures
contract.
52. The method of claim 41, wherein the hedged instrument comprises
a futures contract.
53. The method of claim 52, wherein: the first position on the
first tradable instrument comprises a long position on a stock; and
the second position on the second tradable instrument comprises a
short position on a tradable fund.
54. The method of claim 52, wherein: the first position on the
first tradable instrument comprises a long position on a stock; and
the second position on the second tradable instrument comprises a
tradable instrument based at least on a plurality of stocks within
an investment sector.
55. The method of claim 41, wherein: the hedged instrument
comprises a futures contract; the first position on the at least a
first tradable instrument comprises a long position which
corresponds with the price of a first tradable instrument; and the
second position on the at least a second tradable instrument
comprises a short position which corresponds with the price of a
second tradable instrument.
56. A method for providing a hedged futures contract, the method
comprising: identifying a first position on a first tradable
instrument; identifying a second position on a second tradable
instrument, the second position being contrary to the first
position; creating an index comprising the first position and the
second position; creating a hedged futures contract having a value
based on the index.
57. The method of claim 56, wherein the first position is a long
position and the second position is a short position.
58. The method of claim 57, wherein: the first tradable instrument
comprises a stock; and the second tradable instrument comprises a
tradable fund.
59. The method of claim 57, wherein: the first tradable instrument
comprises a stock; and the second tradable instrument comprises a
tradable instrument based at least on a plurality of stocks within
an investment sector.
60. The method of claim 56, wherein: the hedged futures contract
has a maturity time; and the hedged futures contract may be traded
multiple times until the maturity time.
61. The method of claim 56, wherein the hedged futures contract may
be traded electronically.
Description
RELATED APPLICATIONS
[0001] This application claims the benefit of U.S. Provisional
Application No. 60/343,885, filed Dec. 26, 2001.
TECHNICAL FIELD OF THE INVENTION
[0002] This invention relates in general to tradable financial
instruments, and more particularly, to systems and methods for
providing financial instruments including contrary positions.
BACKGROUND OF THE INVENTION
[0003] Investments having potential for large returns often involve
some element of risk. Many approaches have been used to hedge
against or otherwise manage risk associated with such investments.
One well known way to reduce such risk is through the
diversification of investments. In theory, diversification of
investments applies the law of averages in order to reduce risk
from multiple independent sources.
[0004] Many times, however, it is possible to hedge against a first
position, such as a market commitment to a tradable asset, for
example, by undertaking a second position that may share some
common risk factors or elements with the first. In doing so,
investors may be presented with different options to hedge against
the risk associated with a given position. For instance, an
individual interested in investing in a particular stock may be
unwilling to bear potential losses beyond a particular level. Since
the price of the stock could drop at any time to undesirable
levels, such an investment inherently carries an element of risk.
To hedge against such risk, the investor may purchase both the
stock and a put option. The put option gives the investor the right
to sell the stock at a fixed exercise, or strike, price up until a
given expiration date. If the stock price drops below the strike
price, the investor may execute the put option and profit the
difference between the exercise price of the put option and the
market price of the stock at the time the put option is executed.
In this manner, the investor may protect himself against the risk
(and the associated losses) that the stock will decrease in price
below the strike price of the put option. Thus, it can be seen that
an investor may hedge risk by combining a buy position on a
security with the right to exercise a contrary sell position on
that same security.
[0005] Not only do hedged positions decrease risk, they can be used
to ensure a sale that will substantially limit losses. For example,
an investor may purchase a stock and sell a call option giving the
option buyer the right to buy the stock at an exercise price by a
given date. Suppose a pension fund holds 1,000 shares of stock with
a current price of $55 per share and intends to sell all 1,000
shares if the stock price reaches $60 per share. By selling $5
calls on all 1,000 shares, each having an exercise price of $60,
the fund can make $5,000 in revenues. If the stock price falls, the
call options will not be executed and thus the fund's losses due to
the fallen stock price will be mitigated by the $5,000 revenues
from the sale of the call options. If the stock price rises above
$60 (say, to $70 per share) and the call options are exercised, the
fund has not lost any potential profits since the fund originally
intended to sell its shares at $60 per share anyway.
[0006] The examples provided above illustrate how different
positions may be combined to hedge against risk and/or create
profit opportunities. However, in order to engage in such trades,
traders must be well-informed about market conditions to anticipate
such opportunities, and must also be able and willing to undertake
such commitments. In addition, in order to obtain a particular
level of risk protection or profit margin, significant capital and
firm commitments are often required, as well as various transaction
costs, margin requirements and/or credit and credibility
checks.
SUMMARY OF THE INVENTION
[0007] In accordance with the present invention, systems and
methods for providing hedged financial instruments including, or
based on, contrary positions are provided. In general, hedged
instruments that combine contrary positions on one or more other
tradable instruments arc provided. The hedged instruments may be
more liquid and require less transaction costs than separately
undertaking the same contrary positions on the tradable instruments
that make up the hedged instruments.
[0008] According to one embodiment, a market for trading hedged
instruments is provided. The market includes at least one hedged
instrument having a value based at least on a first position on a
first tradable instrument and a second position on a second
tradable instrument. The second position is contrary to the first
position. According to another embodiment, another market for
trading hedged instruments is provided. The market includes at
least one hedged futures contract having a value based on an index
of positions on a plurality of tradable instruments. The positions
include a first position on a first tradable instrument and a
second position on a second tradable instrument. The second
position is contrary to the first position.
[0009] According to yet another embodiment, a method for providing
a hedged instrument is provided. The method includes identifying a
first position on a first tradable instrument and a second position
on a second tradable instrument, in which the second position is
contrary to the first position. The method further includes
undertaking the first position and the second position and creating
a hedged instrument including the first position and the second
position.
[0010] Various embodiments of the present invention may benefit
from numerous advantages. It should be noted that one or more
embodiments may benefit from some, none, or all of the advantages
discussed below.
[0011] One advantage is that hedged instruments may provide an
investor and opportunity to indirectly participate in contrary
positions, without having to actually undertake such positions. In
this manner, an investor may be able to hedge particular risks
and/or otherwise better control particular investment risks. In
addition, hedged instruments may permit an investor to indirectly
undertake a position that the investor would not be permitted to
directly undertake. For example, an investor who may not be
approved to short a particular asset (due to certain credit
restrictions, for example) may be approved to trade a hedged
instrument including a short position on the particular asset.
[0012] Another advantage is that hedged instruments may attract
more investors to a particular market, which may increase the
liquidity of markets for such hedged instruments as well as markets
for readily existing instruments. As a result, such instruments may
become less expensive to trade. In addition, commissions may be
reduced since a provider may be able to undertake the underlying
positions of a hedged instrument for a lower overall commission
than other investors, therefore reducing the commissions involved
in the underlying positions.
[0013] Yet another advantage is that hedged futures contracts may
provide various tax advantages. For example, unlike shares of stock
or certain funds, hedged futures contracts do not make taxable
distributions to investors. Also, hedged futures contracts reduce
or avoid taxation associated with the buying and/or selling of
underlying instruments that is common with other investment
strategies.
[0014] Other technical advantages will be readily apparent to one
having ordinary skill in the art from the following figures,
descriptions, and claims.
BRIEF DESCRIPTION OF THE DRAWINGS
[0015] For a more complete understanding of the present invention
and for further features and advantages, reference is now made to
the following description, taken in conjunction with the
accompanying drawings, in which:
[0016] FIG. 1 illustrates an example market in which hedged and
available instruments may be traded in accordance with an
embodiment of the present invention;
[0017] FIG. 2 is a chart illustrating the payments and payoffs
associated with the long and short positions on two bonds over time
in accordance with an embodiment of the present invention;
[0018] FIG. 3 illustrates an example transaction of a hedged
instrument that includes the contrary positions of FIG. 2 in
accordance an embodiment of the present invention;
[0019] FIG. 4 is a chart illustrating the returns and profits
associated with a combination of options versus price in accordance
with an embodiment of the present invention;
[0020] FIG. 5 illustrates an example transaction of the hedged
instrument that includes the contrary positions of FIG. 4 in
accordance with an embodiment of the present invention; and
[0021] FIG. 6 is a flow chart illustrating an example method for
providing a hedged instrument in accordance with an embodiment of
the present invention.
DETAILED DESCRIPTION OF THE INVENTION
[0022] Example embodiments of the present invention and their
advantages are best understood by referring now to FIGS. 1 through
6 of the drawings, in which like numerals refer to like parts.
[0023] This invention relates to systems and methods for providing
hedged tradable financial instruments that can be traded in a
market. The tradable hedged instruments may include, or be based
on, contrary positions on readily available financial
instruments.
[0024] In an example of a typical investment scenario, an investor
buys an instrument such as a stock or a bond, for example, and
sells it after some time. This is an example of a long position
that is held by the investor who purchases the instrument. To
obtain a short position, an investor borrows an instrument from a
lender, such as a broker, for example, and immediately sells the
instrument to another buyer. After some time, the same investor may
then purchase the instrument (or another instance of the same
instrument, such as another share of the same stock, for example),
hopefully at a lower price than the price at which he sold the
borrowed instrument, and return the instrument to the lender, thus
covering his or her position while hopefully retaining a
profit.
[0025] By combining contrary positions in such instruments, an
investor may protect him or herself from at least some of the risk
associated with undertaking a single position on such instruments.
Several sources of uncertainty may introduce elements of risk
against which an investor may want to be protected. For example,
such risks may be caused by general economic conditions such as the
business cycle, changes in the inflation rate, changes in the
interest rates, changes in the exchange rates and varying market
conditions. Other sources of risk may relate to the actual company
or companies issuing assets or other financial instruments, such as
credit or default risk, for example.
[0026] A hedged instrument may be provided which includes, or is
based on, a number of individual positions such as those described
above, including positions which are contrary to each other. An
investor may trade such an instrument without committing to the
individual positions upon which the instrument is based. Thus, in
some embodiments, the investor may reduce transaction costs, such
as trade commissions, since the investor may enter into a hedged
position against a prevailing risk while only paying commissions on
a single trade.
[0027] FIG. 1 depicts a market 101 for hedged instruments and a
market 102 for readily available instruments. Hedged instruments
that include, or are based on, combinations of contrary positions
may be traded in market 101, whereas instruments on which such
contrary positions are based may be traded in market 102. Thus, in
some embodiments, hedged instruments 111 and 151 may be traded in
market 101 and available instruments 112, 122, and 132 may be
traded in market 102. Available instruments 112, 122, and 132 may
include any financial instrument that is available to be traded in
a market, such as, for example, securities (such as stocks or
bonds, for example), options, futures contracts, currencies and
commodities, as well as tradable funds such as index funds, sector
funds and sub-sector funds, for example. In some embodiments,
hedged instruments 111 and 151 and/or available instruments 112,
122, and 132 may be traded electronically and in real-time or
substantially in real-time.
[0028] As shown in FIG. 1, market participants 131, 141, and 142
may be potential traders, investors, speculators, brokers, or a
firm consisting of any combination of traders, investors,
speculators and/or brokers, or any other entity suitable to
participate in a trading market. Provider 121, which may create
hedged instruments that include, or are based on, contrary
positions on available tradable instruments may be a brokerage
firm, an investment bank, or any other entity suitable to create
and/or issue a financial instrument.
[0029] Provider 121 may hold contrary positions on instruments 112
and 122, which may pertain to the same class of instruments. As
used throughout this document, the term contrary positions is
intended to include positions which are directly, indirectly,
completely, or at least partially contrary to each other. In some
embodiments, instruments 112 and 122 may be related. For example,
instruments 112 and 122 may be the same instrument, instances of
the same instrument, instruments pertaining to the same class of
instruments or instruments within the same or similar investment
sector. Furthermore, one of instruments 112 and 122 may be a
derivative of the other. For example, instrument 122 may be a put
option on instrument 112 which is a stock. Provider 121 may create
instrument 111 by combining contrary positions with respect to
already established instruments 112 and 122, as well as various
positions on one or more additional tradable instruments.
[0030] In some embodiments, provider 121 may interact with markets
101 and 102 in order to provide hedged instruments, such as hedged
instrument 111. For example, as shown in the example embodiment of
FIG. 1, provider 121 undertakes positions with respect to
instruments 112 and 122 and provides hedged instrument 111 for
trading. Thus, provider 121 may trade in both markets 101 and 102.
Participant 131 may buy hedged instrument 111 in exchange for a
price, which may be the net worth of the combined positions in
addition to a possible fee for the services provided by provider
121.
[0031] In this exchange, participant 131 does not actually
undertake any position with respect to instruments 112 or 122.
Instead, participant 131 undertakes a position in hedged instrument
111. Participant 131 may then trade instrument 111 with any
participant 141 in market 101. Provider 121 may also trade
instruments 112 and 122 with any other participant 141 or 142,
thereby transferring positions in instruments 112 and 122 to such
participants 141 or 142. In some embodiments, markets 101 and 102
may completely, or at least partially, overlap such that hedged
instruments 111 and 151 and instruments 112, 122, and 132 may be
traded among the same entities. Through such trading, liquidity may
be created in both markets 101 and 102.
[0032] Some investors may wish to simultaneously undertake contrary
positions, such as long and short positions on different types of
bonds issued by the same corporation. Such bonds may have different
maturity dates, and therefore sell at different prices. By longing
one type of corporate bond (in other words, buying a first
corporate bond) while shorting another corporate bond (in other
words, selling a second corporate bond) with a different maturity
date than the first, an investor may create protected profit
opportunities based on the future performance of the company
issuing the bonds.
[0033] An example of undertaking contrary positions on different
bonds is provided as follows. Assuming that among the several types
of bonds a particular corporation provides, two particular types of
bonds are currently trading. The first bond is selling at 70 cents
on the dollar with a maturity date of 2004, while the second bond
is selling at 60 cents on the dollar with a maturity date of 2007.
Both bonds may pay 10% yearly interest. The 2007 bond sells at a
larger discount since it matures three years after the 2004 bond
and thus carries more credit risk. A speculator who believes the
issuing corporation is at risk of defaulting on its bonds in the
future may wish to short one or more of the company's bonds.
However, this may involve undertaking large risks due to the
binding commitment to deliver interest coupons as well as the par
value of the bond at maturity. Moreover, if the price of the bond
does not drop in the future, the speculator is faced with buying
back the same kind of bond to cover his or her position at a high
price, thus incurring significant losses.
[0034] Instead, the speculator may undertake a long position on the
2004 bond and a short position on the 2007 bond. In other words,
the speculator may long the 2004 bond and short the 2007 bond. Such
an investment strategy may offer significant profit opportunities
in the case that the corporation defaults or its bonds devaluate,
especially after the year 2004 since the 2004 bond will have
matured and paid the speculator its par value of $1,000. Moreover,
the yearly interest payments of $100 to which the speculator may be
committed with respect to the 2007 bond will be offset by the $100
yearly coupons received from longing the 2004 bond.
[0035] The following illustrates an example hedged instrument
according to one embodiment of the present invention. Suppose a
trader undertakes a long position on the 2004 bond and a short
position on the 2007 bond at the end of the year 2001. As shown in
FIG. 2, which illustrates a chart of the various payoffs associated
with such an investment scheme versus time, the trader would have
to pay $700 (indicated as payment 201) for the long position in
return for $600 (indicated as payoff 202) from the short position
in the original year 2001. Over the next three years, the trader
will expect to receive $100 in yearly coupons (indicated as payoffs
210) on the 2004 bond and incur a $100 expense in yearly coupons
(indicated as payments 220) on the 2007 bond. Once the 2004 bond
reaches maturity, the trader will expect to receive the $1000 par
value (indicated as payoff 203) associated with the 2004 bond,
while maintaining payment of $100 coupons 220 until the year 2007,
at which time the trader will be obligated to the pay par value of
$1000 (indicated as payment 204) for the 2007 bond.
[0036] After the year 2004, the trader may wait until the 2007 bond
maturity date and pay par value 204, or may chose to cover his or
her short position. If the corporation devalues, the trader may buy
back a 2007 bond at a gain due to the devaluation of the corporate
2007 bond. In some embodiments, the trader may undertake the long
and short positions on the 2004 and 2007 bonds as described above,
and provide or sell a hedged instrument that provides a payoff
based at least in part on the combined payoffs and payments
discussed above regarding the 2004 and 2007 bonds.
[0037] FIG. 3 illustrates the details of an example trade of hedged
instrument 111 between participant 131 and provider 121 in
accordance with one embodiment of the present invention. Hedged
instrument 111 includes, or is based on, the long and short
positions described above. An investor or participant 131 may
purchase hedged instrument 111 issued or sold by provider 121 for a
particular price 310 that may include the total costs incurred by
provider 121 in undertaking the various positions on the underlying
instruments. In addition, in some embodiments, the price 310 may
also include a service fee 314.
[0038] Thus, in the example discussed above, price 310 may consist
of net present value 312 of the total payments and payoffs involved
with longing the 2004 bond and shorting the 2007 bond, plus service
fee 314. Net present value 312 may correspond to the net yearly
payoffs (-$100, $0, $0, +$1000, -$100, -$100, and -$1100) for each
of the years 2001 through 2007. In some embodiments, net present
value 312 may be evaluated at an agreed upon discount rate. For
example, if the discount rate is assumed to be %5, net present
value 312 would amount to about -$220. Therefore, the cost of such
an investment to provider 121 may be calculated by the absolute
value of net present value 312, which may be less expensive than
purchasing one of the two bonds, due to the offsets created by the
combined contrary positions.
[0039] In return for the investment, participant 131 may receive at
least a portion of the net capital gain realized if provider 121
covers his or her short position with respect to the 2007 bond. For
example, if the issuing corporation defaults on its bonds or if its
bonds devaluate, provider 121 may realize a substantial gain, of
which at least a portion may be transferred to participant 131 as
payoff 320. Otherwise (such as in the case that the bonds do not
devaluate), the gains and losses from the contrary positions on the
2004 and 2007 bonds substantially offset each other, and payoff 320
may be a relatively small negative number. In that case, provider
121 may charge participant 131 the value of the net capital loss or
an amount based on the net capital loss. In summary, provider 121
receives a payment from participant 131 and provides participant
131 an opportunity to make significant profits at a relatively low
cost, and without committing to any position on any underlying
instrument. In some embodiments, participant 131 may trade
instrument 111 with any other suitable entity, which may similarly
trade instrument 111 to another entity, and so on, until the
maturity date of instrument 111 or some other predefined date. In
addition, in some embodiments, provider 121 may be operable to
trade the underlying instruments (such as the 2004 and 2007 bonds
in the example discussed above) of the hedged instruments
individually.
[0040] As another example, a hedged instrument may be based on a
"money spread" on a particular stock (or other suitable
instrument). A money spread may be obtained by combining two or
more call options (or two or more put options) on the same stock
with different exercise prices, in which one call may be bought and
one sold, to obtain contrary positions on the same stock.
[0041] For example, suppose a first call option having an exercise
price of $50 is purchased for $5, and a second call option having
the same maturity date as the first and having an exercise price of
$60 is sold (or written) for $3. The payoff of these combined
positions is the difference between the values of the bought and
sold calls. FIG. 4 illustrates the return and profit on a
hypothetical money spread versus the stock price for the pair of
call options discussed above. Bold line 410 in FIG. 4 represents
the payoff of the money spread, whereas dotted line 412 represents
the profit of the money spread based on the contrary positions
described above. FIG. 4 illustrates three possible outcomes: a
low-price region 401, a middle-price region 402, and a high-price
region 403. If the stock price is less than $50 (as shown in region
401), neither of the options will typically be exercised. In this
case, the profit of such an investment would be -$2 from buying the
first option for $5 and selling the second option for $3.
[0042] On the other hand, if the stock price is greater than $50
but less than $60, as shown in region 402, the first option will
typically be exercised while the second will not. The entity that
purchased the first call has the right to buy the stock at $50,
which is less than the current value of the stock. That entity may
then immediately sell the stock at the higher current stock price
and receive the net profit shown by dotted line 412 in region
402.
[0043] If the stock price exceeds $60, as shown in region 403, both
call options will typically be exercised. The entity owning the
first call buys the stock realizing a capital gain whereas the
entity owning the second call buys back the stock from the former
at the same price. The former investor's payoff is therefore fixed
at $10 with a profit of $8. These figures remain constant as long
as the stock price remains greater than or equal to $60, as shown
in region 403.
[0044] This scheme may be referred to as a bullish spread, since
the payoff either increases or is unaffected by increases in the
stock price. One motivation for a bullish spread may be that the
investor buying the first call would rather capture some fixed
profit (at the minimal risk of losing a relatively small amount)
than purchase the stock itself when he or she believes one option
is overpriced relative to another.
[0045] Thus, in some embodiments, a trader may purchase a first
call option and sell a second call option and provide a hedged
instrument including, or based on, a money spread created by the
two options as described above. FIG. 5 illustrates the details of
an example trade of a hedged instrument 151 between participant 131
and provider 121 in accordance with one embodiment of the present
invention. Hedged instrument 151 combines, or is based at least in
part on, the individual positions of a money spread on the same
stock as described above. The trader or provider 121 may issue
instrument 151 which results in payoff 520. Payoff 520 may be the
difference between the stock price and the lower exercise price if
the stock price falls below the lower exercise price, or the
difference between both exercise prices ($10) if the stock price
exceeds the higher exercise price.
[0046] Provider 121 may sell instrument 151 to participant 131 for
price 510. Price 510 may include the net cost of undertaking the
underlying positions of the hedged instrument. Thus, in the example
provided above, price 510 may include the $2 price difference 512
between the two call options. In addition, in some embodiments,
price 510 may include a service fee 514.
[0047] As another example, hedged instrument 151 may include, or be
based on, one or more futures contracts. For example, a particular
hedged instrument may include, or be based on, a long position on a
first futures contract and a short position on a second futures
contract. In some embodiments, hedged instrument 151 itself
comprises a futures contract which may be traded in any suitable
market. For example, hedged instrument 151 may be a futures
contract that includes or is based on two or more underlying
futures contracts, two or more of which are contrary.
[0048] Thus, hedged instrument 151 may be a hedged futures contract
having a value, or price, based on positions undertaken on any two
or more underlying instruments. For example, such positions may
include a long position on a first stock and a short position on a
second stock. As another example, such positions may include a long
position on a stock and a short position on a tradable fund, such
as an index fund or a fund related to a particular investment or
technology sector or sub-sector, for example, or vice versa. As yet
another example, such positions may include a long position on a
stock and a short position on a tradable instrument having a value
based at least on the value of a plurality of stocks within an
investment sector. As yet another example, at least one of the
underlying positions may comprise a position which corresponds
with, or tracks, the price of a particular tradable instrument. For
example, a particular hedged futures contract may be based on a
first position comprising a long position which corresponds with,
or tracks, the price of a first tradable instrument (such as a
stock, bond, tradable fund or currency, for example) and a second
position comprising a short position which corresponds with, or
tracks, the price of a second tradable instrument.
[0049] In some embodiments, hedged instrument 151 may be a hedged
futures contract having a value or price based at least in part on
an index of positions on a plurality of tradable instruments. In
one embodiment, the value or price of a particular hedged
instrument 151 follows or tracks (to at least some extent) the
value or price of such an index. The value or price of such index
may be calculated based on the value of various positions on a
variety of underlying tradable instruments. The positions upon
which such an index arc based may include, for example, any of the
various combinations of positions discussed above. For example, in
a particular embodiment, a provider may provide a hedged futures
contract which tracks the value or price of a particular index. The
index may be based at least in part on a long position on one or
more stocks and a short position on one or more tradable funds,
such as tradable industry sector funds. A provider may create,
provide and/or manage any number of different hedged futures
contracts as well as the underlying indexes. The value or price of
a hedged futures contract may also include one or more fees, which
may include various transaction and/or commission fees, for
example.
[0050] Hedged futures contracts may be more efficient than similar
investments since they do not require the provider to actually
purchase and/or sell the underlying instruments, such as stocks,
bonds or currencies, for example. In addition, hedged futures
contracts may provide various tax advantages. For example, unlike
shares of stock or certain funds, hedged futures contracts do not
make taxable distributions to investors. Also, hedged futures
contracts reduce or avoid taxation associated with the buying
and/or selling of underlying instruments that is common with other
investment strategies.
[0051] It should be understood that with regard to all of the
hedged instruments discussed herein, the number of long positions
need not correspond to the number of short positions undertaken.
Potential investors or providers may choose to combine any number
of contrary positions on the same or any number of different
instruments as desired in order to create a particular hedged
instrument. Any suitable contrary positions on any suitable
instrument or instruments may be combined or used as a basis to
create a tradable hedged instrument that may be traded by any
participant within a market.
[0052] Combinatory schemes such as the ones described above may be
advantageous since they may give interested entities the
opportunity to virtually participate in such contrary positions,
without having to actually undertake such positions. In addition,
in some embodiments, investors who may not be able to trade
particular underlying instruments may be able to trade hedged
instruments including or based on such underlying instruments. For
example, an investor who may not be able to may not be approved to
short a particular asset (due to certain credit restrictions, for
example) may be approved to trade a hedged instrument including a
short position on the particular asset. Moreover, hedged
instruments such as those discussed above may attract more
investors to a particular market, which may increase the liquidity
of markets for such hedged instruments as well as markets for
readily existing instruments. As a result, such instruments may
become less expensive to trade. In addition, commissions may be
reduced since a provider may be able to undertake the underlying
positions of a hedged instrument for a lower overall commission
than other investors, therefore reducing the commissions involved
in the underlying positions.
[0053] In addition, by presenting potential investors with a
variety of hedged instruments that include various desirable
combinations of positions, such potential investors may save the
time and effort needed to identify such desirable combinations of
positions. Furthermore, trading such hedged instruments may provide
accounting advantages and opportunities for companies to
restructure their balance sheets. For example, in some situations,
a hedged instrument may be included in a balance sheet (such as the
balance sheet of the buyer or seller of the hedged instrument, for
example) without including each of the individual underlying
positions of the hedged instrument, making the underlying positions
transparent and thus simplifying the balance sheet.
[0054] FIG. 6 is a flow chart 600 illustrating an example method
for providing a hedged instrument including, or based on, contrary
positions in two or more underlying instruments in accordance with
an embodiment of the present invention. At step 610, two or more
fully or at partially contrary positions on one or more tradable
instruments may be identified by a provider (in other words, the
entity wishing to create a tradable hedged instrument). The
provider may then undertake the identified positions at step 620.
At step 630, the provided may create and/or issue a hedged
instrument that offers a payoff that combines or is based on the
payoffs of the underlying positions. The provider may then sell the
hedged instrument to another entity at step 640 for a price which
may include the net worth of the combined positions in addition to
a service fee. In some embodiments, the provider may buy back the
hedged instrument if desired or if one or more of the undertaken
positions is recalled. In addition, the provider may also trade the
underlying instruments on which the positions were undertaken with
yet another entity at step 650.
[0055] Although an embodiment of the invention and its advantages
are described in detail, a person skilled in the art could make
various alternations, additions, and omissions without departing
from the spirit and scope of the present invention as defined by
the appended claims.
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