Compensation Contract System for Non-Financial Risk
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Solution Overview
Problem
Existing systems face challenges in effectively reducing profit risk for businesses influenced by non-financial risk factors such as weather, natural disasters, and economic indicators using derivatives with a small cash flow.
Innovation Solution
A compensation contract supporting system that utilizes a database to calculate probabilities and ratios for compensation amounts based on predetermined conditions, including non-financial factors, to manage and mitigate profit risks by correlating various risk factors and calculating compensation amounts for both financial and non-financial conditions.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If derivatives are used to reduce profit risk, then financial risk can be effectively reduced, but non-financial risk factors cannot be covered with small cash flow
Solution Approach 1:
The compensation contract system is designed to handle multiple types of risk factors (financial and non-financial) through a unified platform. The system calculates probabilities and compensation amounts for diverse risk factors including exchange rates, weather conditions, natural disasters, and economic indicators, making it universally applicable across different risk categories without requiring separate specialized systems for each risk type.
2Adaptability or versatility
If compensation contracts cover multiple risk factors including non-financial factors, then versatility improves, but calculation complexity increases
Solution Approach 1:
The calculation process is segmented into distinct functional modules: a database stores statistical data for multiple risk factors, a probability calculation unit computes occurrence probabilities for each risk factor independently, and a ratio calculation unit determines compensation amounts based on these probabilities. This segmentation allows the system to handle complex multi-factor risk assessment through a series of manageable, independent calculation steps rather than a single complex computation.
Data Source
AI summary
A compensation contract supporting system that supports a compensation contract which provides a customer compensation for a profit risk created by a plurality of risk factors that influence a profit of the customer, comprising: a database for storing statistical data of the plurality of risk factors; a first probability calculation unit for calculating a probability, in which a part of the plurality of the risk factors satisfy a predetermined first condition, and a probability, in which remaining plurality of the risk factors satisfying a predetermined second condition using the database, and at least one of the first condition and the second condition being a non-financial condition that is not related to a financial product; and a ratio calculation unit for calculating a ratio between a first compensation amount to be paid or received by the customer when the part of the risk factors satisfy the first condition and a second compensation amount to be paid or received by the customer when the remaining risk factors satisfy the second condition using the probability calculated by the first probability calculation unit.