Scanning based spreads using a hedge ratio non-linear optimization model

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.

What is claimed is: 
     
         1 . 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 multiplier value, wherein a quantity of the first product in each of the plurality of test portfolios varies based on the 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.   
     
     
         2 . The non-transitory computer readable medium of  claim 1 , including instructions that when executed are operable to:
 identify a spread in each of the plurality of test portfolios;   calculate, at the processor, an implied margin for each spread; and   calculate, at the processor, an outright margin for each spread, wherein the implied credit rate was calculated based on the implied margin and the outright margin.   
     
     
         3 . The non-transitory computer readable medium of  claim 1 , wherein the error is a squared difference between the implied credit rate and the predetermined target credit rate. 
     
     
         4 . The non-transitory computer readable medium of  claim 1 , wherein the one of the plurality of test portfolios has a smallest error between the implied credit rate and the predetermined target credit rate. 
     
     
         5 . The non-transitory computer readable medium of  claim 1 , wherein the one of the plurality of test portfolios is delta neutral. 
     
     
         6 . The non-transitory computer readable medium of  claim 1 , including instructions that when executed are operable to:
 receive the predetermined target credit rate from an exchange, a clearing organization or a combination thereof.   
     
     
         7 . The non-transitory computer readable medium of  claim 1 , including instructions that when executed are operable to:
 identify a plurality of spreads in each of the plurality of test portfolios, wherein the error for each of the plurality of test portfolios is based a sum of squared differences associated with each of the plurality of spreads.   
     
     
         8 . The non-transitory computer readable medium of  claim 1 , wherein each of the plurality of test portfolios includes a plurality of products, the instructions further operable to:
 identify every combination of spreads formable from the plurality of products.   
     
     
         9 . The non-transitory computer readable medium of  claim 1 , wherein the one of the plurality of portfolios includes X products and the every combination of spreads includes (X)(X−1)/2 spreads. 
     
     
         10 . The non-transitory computer readable medium of  claim 1 , wherein the multiplier value is an incrementing multiplier value. 
     
     
         11 . The non-transitory computer readable medium of  claim 10 , the incrementing multiplier value varies in whole number increments starting with 1 and incrementing by 1 to a maximum.