Scanning Based Spreads Using a Hedge Ratio Non-Linear Optimization Model
AssigneeChicago Mercantile Exchange Inc.
InventorsMuhammed Hadi, Amy Stephan, Ketan Patel, Dmitriy Glinberg
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Abstract
The disclosed embodiments utilize hedge ratios to determine the optimal hedge ratio and associated scanning spread. This tells traders what ratios of the quantities of products they should have in their portfolio in order to maintain the status of the portfolios as delta neutral, i.e. be delta hedged, and receive optimal margin credits therefore.
Claims20
A method comprising:
- receiving, at a processor, an identity of a first product and a hedge ratio;
- generating, at the processor, a plurality of test portfolios according to a multiplier value, wherein a quantity of the first product in each of the plurality of test portfolios varies based on the multiplier value;
- calculating, at the processor, quantities of at least one second product for each of the plurality of test portfolios based on the quantity of the first product and the hedge ratio;
- calculating, at the processor, an implied credit rate for each of the plurality of test portfolios;
- and
- selecting one of the plurality of test portfolios according to an error between the implied credit rate and a predetermined target credit rate.
A non-transitory computer readable medium including instructions that when executed are operable to:
- receive, at a processor, an identity of a first product;
- generate, at the processor, a plurality of test portfolios according to an incrementing multiplier value, wherein a quantity of the first product in each of the plurality of test portfolios varies based on the incrementing multiplier value;
- calculate, at the processor, quantities of at least one second product for each of the plurality of test portfolios based on the quantity of the first product;
- calculate, at the processor, an implied credit rate for each of the plurality of test portfolios;
- and
- select one of the plurality of test portfolios according to an error between the implied credit rate and a predetermined target credit rate.
A system for computing quantities of each of a plurality of derivative products to include in a portfolio, the system comprising:
- a processor;
- and
- a memory storing computer readable instructions configured to cause the processor to:
- identify an exemplary set of first quantities of at least one derivative product and for each first quantity of the at least one derivative product of the set of first quantities:
- compute a second quantity of another derivative product such that a product delta of the second quantity offsets a product delta of the first quantity of the at least one derivative product;
- and
- for a spread combination of the first and second quantities of the at least one derivative product and the another derivative product:
- compute an implied margin for the spread combination;
- compute an outright margin for the spread combination;
- compute an implied credit rate for the spread combination based on the implied margin and the outright margin for the spread combination;
- and
- compute a difference between the implied credit rate and a target credit rate for the spread combination;
- identify a target quantity, of the at least one derivative product of the set of quantities, having a lowest summed computed difference.
Dependencies are inferred from the claim text.