Methods and systems for creating an interest rate swap volatility index and trading derivative products based thereon

Abstract

Systems and methods for creating and disseminating an interest rate swap volatility index based on an underlying interest rate swaption, and for creating and trading derivative investment products based on the interest rate swap volatility index, are disclosed. In one aspect, an interest rate swap volatility index based on an underlying interest rate swaption is calculated. The interest rate swap volatility index may be accessed by a processor of a trading platform and a standardized, exchange traded derivative may be created based on the calculated interest rate swap volatility index. Information associated with the interest rate swap volatility index derivative may then be transmitted for display.

Description

CROSS-REFERENCE TO RELATED APPLICATIONS[0001]This application claims the benefit of U.S. Application Ser. No. 61 / 499,077, filed Jun. 20, 2011, and claims the benefit of U.S. Application Ser. No. 61 / 577,270, filed Dec. 19, 2011, and the entirety of each of these aforementioned applications is hereby incorporated herein by reference.FIELD OF THE DISCLOSURE[0002]The present disclosure relates to derivative investment markets. More specifically, the present disclosure relates to electronically creating and disseminating one or more volatility indices calculated using interest rate swaption (i.e., is an option granting its owner the right but not the obligation to enter into an underlying interest rate swap) data, and facilitating the electronic creation and trading of derivative products based on one or more indices relating to volatility. Additionally, the present disclosure relates to electronically creating and disseminating one or more indices relating to interest rate swap volatili...

AI Technical Summary

Benefits of technology

[0014]According to one aspect, a computer-implemented method of calculating an interest rate swap volatility index is provided. The method includes, using a processor in a trading platform, calculating an interest rate swap volatility index associated with an underlying interest rate swaption. The processor then displays the interest rate swap volatility index associated with the underlying interest rate swaption on a trading platform display device coupled with the trading platform. Calculating the interest rate swap volatility index may include the processor aggregating prices of both at-the-money and out-of-the -money receiver and payer interest rate swaptions, for example in a single equation that is independent of any option pricing model. The method may reduce a relationship between an implied volatility of the underlying interest rate swaption and a strike of the underlying interest rate swaption into a single point for each maturity-tenor combination of the underlying interest rate swaption.

Problems solved by technology

While several volatility indices exist, there currently exists no implementation of a volatility gauge for interest rate swap markets that is theoretically consistent with prices prevailing in existing swaption markets.

Particularly, no standardized benchmarks exist to estimate the volatility in the interest rate swap (“IRS”) markets over a given investment horizon.

However, the strategies employed in attempting to hedge risk via the trading of interest rate swaptions do not necessarily lead to accurate profits and losses due to price dependency, i.e., the tendency to generate profits and losses that are affected by the path of price movements between trade inception and expiry dates rather than the absolute price level prevailing at the time of swaption expiry.

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