Computer-based system for hedging and pricing customized basket exchange swaps

Abstract

A computer-based system for hedging and pricing customized basket exchange swaps including a computer-based method for efficiently determining an asset mix to hedge a customized basket exchange swap with a specified term, notional amount, reference index, and custom index, and an estimated tracking error for the asset mix, comprising the steps of, updating a matrix factorization to reflect current financial market data, calculating an objective vector based on current composition of the custom index, determining a correlation coefficient and the asset mix from the matrix factorization and the objective vector, and, calculating an estimated tracking error from the correlation coefficient. The system also includes a computer-based method for determining a price to charge for entering into a customized basket exchange swap, based on an estimated tracking error of an asset mix to hedge the customized basket exchange swap, and a capital requirement and a target rate of return for a counterparty to the customized basket exchange swap. The system also includes an article of manufacture comprising a customized basket exchange swap with a specified term, notional amount, reference index, and custom index operatively arranged to allow an index administrator designated by a counterparty to such customized basket exchange swap to specify a composition of the custom index at a start of the term and changes to the custom index during the term, while guaranteeing that a value of the customized basket exchange swap at an end of the term will equal the notional amount times the difference in the growth of the reference and custom indices.

Dependencies are inferred from the claim text.