Method, system, and computer program product for trading interest rate swaps

Abstract

A method, system, computer program product, and data structure for trading in which a standardized contract is traded. The contract obligates a buyer and a seller to settle the contract based on a price of the contract at a first effective date. The contract is traded through an exchange that guarantees payment to the buyer of any amount owed to the buyer from the seller as a result of the contract and that guarantees payment to the seller of any amount owed to the seller from the buyer as a result of the contract. The price of the contract is determined based on preselected notional cash flows discounted by at least one point on an interest rate swap curve obtained from a preselected swap rate source.

Description

[0001] This application is a continuation of U.S. Application Ser. No. 09 / 209,746, filed Dec. 11, 1998, which is incorporated herein by reference. This application claims priority from U.S. Provisional Application Ser. No. 0 / 074,588, filed Feb. 13, 1998, U.S. Provisional Application Ser. No.0 / 101,419, filed Sep. 22, 1998, and U.S. Provisional Application Ser. No. 0 / 104,400, filed Oct. 15, 1998, each of which is incorporated herein by reference.BACKGROUND OF INVENTION[0002] 1. Field of the Invention[0003] This invention relates to a method, a system, and a computer program product for trading and settling a product. More particularly, the present invention relates to a method, a system, and a computer program product for trading and settling a contract having a price based on any preselected interest rate swap curve.[0004] 2. Discussion of the Background[0005] An interest rate swap (IRS) is a well known financial transaction which usually occurs between two parties. In a swap, the tw...

AI Technical Summary

Benefits of technology

0088] In accordance with the invention, the pricing model of FIG. 4(a) may be implemented to determine the price of a standardized contract. The transparent pricing of the inventive contracts permits them to be traded on an exchange like other standardized commodity (e.g., cash futures). Since the contracts are predefined by the selected notional cash flows, swap curve, notional maturity, and effective date(s), there is no need for dealers to negotiate terms and make a unique contract for each trade. Thus, the problems that exist in the conventional IRS market (discussed above) are reduced or eliminated by the present invention.

0

Problems solved by technology

However, such an insulation or protection from changing interest rates results in an added cost to the party seeking protection from the potential change.

However, this practice also involves two major disadvantages.

First, both market segments are based on different credits and therefore an unexpected change in the yield differential of the two markets could result in heavy losses.

Second, conventional techniques require efficient access to the bond and repo market.

Specifically, repo transactions can be problematic since these transactions have to be renegotiated on a regular basis and market conditions can be very volatile.

Despite the enormous size of the IRS market, barriers to entry exist for new, and sometimes existing, participants.

Thus, each transaction is a separately negotiated contract with little standardization of financial terms.

The contracts are lengthy and complex, and legal review is required for each transaction.

Hence any large and sophisticated users must endure the overhead burdens associated with the conventional, inefficient operating environment of the IRS market.

Within the IRS market, bilateral nett

Images