System and method using contract for risk transference

Abstract

Disclosed herein is a system and method for eliminating or transferring the non-economic risk of financial securities. The system and method serves to avoid non-economic losses in the first instance, and to counter the adverse capital impact of prior non-economic gap losses by providing capital relief consistent with a determined protected amount. A client sells to an investor its rights to payments from a fixed income securities (FIS) Portfolio that exceed an agreed threshold, or protection value. The investor purchases the rights to the payments from the client for an amount substantially equal to the difference between the protection value and a higher threshold, or implied value. The client and investor agree to a profit sharing arrangement for FIS Portfolio payments over the implied value. As security for the client's obligation to deliver either the FIS Portfolio or its proceeds to the investor after the FIS Portfolio returns reach the protection value, the client pledges the FIS Portfolio or other agreed upon assets, or some combination thereof.

We claim: 
     
         1 . A method for implementing a contract program for quantifying and transferring non-economic risk between a first party and a second party, said method comprising:
 receiving data representing an asset belonging to the first party, wherein the data includes a market value of the asset and principal payments of the asset;   receiving a term date for the program;   generating an economic value of the asset based on the data representing the asset;   calculating a protection value for the asset based on the market value of the asset;   calculating an implied value for the asset based on the economic value, wherein the first party agrees under the program to assign to the second party aggregate principal payments (APP) exceeding the protection value and up to the implied value (“gap payments”);   calculating a contract value based on the difference between the protection value and the implied value, wherein the second party agrees under the program to provide a capital payment to the first party equal to the contract value;   determining the APP of the asset as of the term date;   calculating gap payments due under the program; and   indicating the gap payments due under the program;   wherein at least one of the steps of generating an economic value, calculating a protection value, calculating an implied value, calculating a contract value, determining the APP, and calculating gap payments is performed by a computer.   
     
     
         2 . The method of  claim 1  wherein calculating an economic value of the asset comprises:
 performing a risk analysis based on the data representing the asset; and 
 determining the net present value of expected future principal payments according to the risk analysis. 
 
     
     
         3 . The method of  claim 1  wherein the first party agrees under the program to assign to the second party a portion of the APP exceeding the implied value (“excess payments”), and wherein the method further comprises the steps of:
 calculating any excess payments due under the program; and 
 indicating any excess payments due under the program. 
 
     
     
         4 . The method of  claim 1  wherein the data representing the asset further includes a maturity date of the asset, and wherein the term date for the program is the maturity date of the asset. 
     
     
         5 . The method of  claim 1  further comprising the step of calculating a contract coupon value having a base component based on a major interest rate index, wherein the first party agrees under the program to periodically pay to the second party the contract coupon value. 
     
     
         6 . The method of  claim 5  wherein the contract coupon value also has a bonus component that is based on a risk assessment of the asset. 
     
     
         7 . The method of  claim 1  further comprising the step of determining a termination premium for the early termination of the program, wherein the first party is permitted under the program to cancel the program prior to the term date by paying the second party the termination premium. 
     
     
         8 . A computer-readable medium for implementing a contract program for quantifying and transferring non-economic risk between a first party and a second party, said computer-readable medium bearing a computer program containing instructions which, when implemented by a computer, cause the computer to execute the steps of:
 receiving data representing an asset belonging to the first party, wherein the data includes a market value of the asset and principal payments of the asset;   receiving a term date for the contract program;   generating an economic value of the asset based on the data representing the asset;   calculating a protection value for the asset based on the market value of the asset;   calculating an implied value for the asset based on the economic value, wherein the first party agrees under the contract program to assign to the second party aggregate principal payments (APP) exceeding the protection value and up to the implied value (“gap payments”);   calculating a contract value based on the difference between the protection value and the implied value, wherein the second party agrees under the contract program to provide a capital payment to the first party equal to the contract value;   determining the APP of the asset as of the term date;   calculating gap payments due under the contract program; and   displaying the gap payments due under the contract program.   
     
     
         9 . The computer-readable medium of  claim 8  wherein calculating an economic value of the asset comprises:
 performing a risk analysis based on the data representing the asset; and 
 determining the net present value of expected future principal payments according to the risk analysis. 
 
     
     
         10 . The computer-readable medium of  claim 8  wherein the first party agrees under the contract program to assign to the second party a portion of the APP exceeding the implied value (“excess payments”), and wherein the computer program further contains instructions for:
 calculating any excess payments due under the contract program; and 
 displaying any excess payments due under the contract program. 
 
     
     
         11 . The computer-readable medium of  claim 8  wherein the data representing the asset further includes a maturity date of the asset, and wherein the term date for the contract program is the maturity date of the asset. 
     
     
         12 . The computer-readable medium of  claim 8  wherein the computer program further contains instructions for calculating a contract coupon value having a base component based on a major interest rate index, wherein the first party agrees under the contract program to periodically pay to the second party the contract coupon value. 
     
     
         13 . The computer-readable medium of  claim 12  wherein the contract coupon value also has a bonus component that is a based on a risk assessment of the asset. 
     
     
         14 . The computer-readable medium of  claim 8  wherein the computer program further contains instructions for determining a termination premium for the early termination of the contract program, wherein the first party is permitted under the contract program to cancel the contract program prior to the term date by paying the second party the termination premium. 
     
     
         15 . An apparatus for implementing a contract program for quantifying and transferring non-economic risk between a first party and a second party, said apparatus comprising:
 a processor;   a display;   a memory coupled to the processor and containing instructions executable by the processor which, when implemented by the processor, cause the processor to execute the steps of:
 receiving data representing an asset belonging to the first party, wherein the data includes a market value of the asset and principal payments of the asset; 
 receiving a term date for the program; 
 generating an economic value of the asset based on the data representing the asset; 
 calculating a protection value for the asset based on the market value of the asset; 
 calculating an implied value for the asset based on the economic value, wherein the first party agrees under the program to assign to the second party aggregate principal payments (APP) exceeding the protection value and up to the implied value (“gap payments”); 
 calculating a contract value based on the difference between the protection value and the implied value, wherein the second party agrees under the program to provide a capital payment to the first party equal to the contract value; 
 determining the APP of the asset as of the term date; 
 calculating gap payments due under the program; and 
 displaying the gap payments due under the program on the display. 
   
     
     
         16 . The apparatus of  claim 15  wherein calculating an economic value of the asset comprises:
 performing a risk analysis based on the data representing the asset; and 
 determining the net present value of expected future principal payments according to the risk analysis. 
 
     
     
         17 . The apparatus of  claim 15  wherein under the program the first party agrees to assign to the second party a portion of the APP exceeding the implied value wherein the memory further contains instructions for:
 calculating any excess payments due under the program,; and 
 displaying any excess payments due under the program. 
 
     
     
         18 . The apparatus of  claim 15  wherein the data representing the asset further includes a maturity date of the asset, and wherein the term date for the program is the maturity date of the asset. 
     
     
         19 . The apparatus of  claim 15  wherein the memory further contains instructions for calculating a contract coupon value having a base component based on a major interest rate index, wherein the first party agrees under the program to periodically pay to the second party the contract coupon value. 
     
     
         20 . The apparatus of  claim 19  wherein the contract coupon value also has a bonus component that is a based on a risk assessment of the asset. 
     
     
         21 . The apparatus of  claim 15  wherein the memory further contains instructions for determining a termination premium for the early termination of the program, wherein the first party is permitted under the program to cancel the program prior to the term date by paying the second party the termination premium.