Methods, systems and computer program products to facilitate the hedging, risk management and trading of derivatives contracts

Abstract

This invention relates to methods, systems and computer programs product to facilitate the hedging, trading and risk management of derivatives contracts on one or more underlying via the introduction of Basis instrument Contracts (BICs).

1 . A method for transforming a derivatives contract, on one or more underlyings, for a single or multi-period trading framework, for any notional amount, into a portfolio of replicating BICs said method comprising:
 a. receiving, via a first input device linked to a computer processor, a choice of a BIC-basis;   b. receiving, via a second input device linked to the computer processor, the payout payment function for the derivatives contract;   c. receiving, via another input device linked to the computer processor prices for elements of said BIC-basis; and,   d. repeating an iterative backward decomposition process to compute by the computer processor the notional amounts of the portfolio of replicating BICs.   
     
     
         2 . The method of  claim 1  further comprising a method to derive the best hedge of the derivatives contract using a limited set of hedging derivatives contracts, comprising:
 a. receiving, via a first input device linked to a computer processor, descriptive information on the limited set of hedging derivatives contracts; 
 b. receiving, via a second input device linked to the computer processor, a choice of metric or norm to measure the hedging error applied to the space of all derivatives contracts that depends on the BIC-basis and using said metric or norm to the residual replicating portfolio; and, 
 c. computing, by the computer processor, a best hedging notional amount for each of the limited set of hedging derivatives contracts by selecting at each step of the iterative backward decomposition process, a particular notional amount for each of the hedging derivatives contracts that minimizes the metric or norm of the residual derivatives contract, wherein said residual derivatives contract is the difference between the derivatives contract and the combination of hedging derivatives contracts with the selected notional amounts; 
 d. and transmitting, via an output device linked to the computer processor, the best hedging notional amount for each of the hedging derivatives contracts.