Constant-Dollar Financial Instruments for Risk Management

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Solution Overview

Problem

Existing financial instruments lack the ability to effectively manage default risk and inflation risk, as they are not tailored to match promised payments with expected future revenues, and they do not eliminate inflation risk or reduce interest rate risk effectively.

Innovation Solution

A computer-aided method for funding using private constant-dollar financial instruments that adjust payments by a price index to maintain constant purchasing power, reducing default risk and interest rate risk, and allowing for the conversion of these instruments into equivalent nominal instruments.

Engineering Contradictions & Design Principles

VSEngineering Contradiction Analysis

1Reliability

If traditional financial instruments are used, then they provide basic funding functionality, but they fail to effectively manage default risk and inflation risk

Engineering Contradiction:

Improvedefault risk managementVSAvoidinflation risk elimination

Core Design Contradiction:

ReliabilityVSAdaptability or versatility

Solution Approach 1:

The patent applies parameter changes by adjusting financial instrument parameters to be indexed to a price index (such as CPI). The payment amounts, principal balances, and other terms are dynamically adjusted based on inflation measurements, transforming fixed nominal instruments into constant-dollar instruments that maintain real value while adapting to changing economic conditions.

Inventive Principle:

Principle #35Parameter changes

Solution Approach 2:

The patent implements dynamics by making financial instrument terms variable rather than fixed. The instruments automatically adjust their payment schedules and amounts based on measured inflation, allowing the system to adapt to changing economic conditions while maintaining the fundamental funding functionality.

Inventive Principle:

Principle #15Dynamics

2Ease of manufacture

If fixed nominal payment instruments are used, then they simplify accounting and valuation, but they expose borrowers to increased default risk when revenues do not match fixed payments

Engineering Contradiction:

Improveaccounting simplicityVSAvoiddefault risk

Core Design Contradiction:

Ease of manufactureVSReliability

Solution Approach 1:

The patent changes the payment parameters from fixed nominal amounts to variable constant-dollar amounts indexed to a price index. This allows payments to maintain constant purchasing power while automatically adjusting to match the borrower's inflation-adjusted revenues, reducing default risk without significantly complicating accounting through standardized indexing mechanisms.

Inventive Principle:

Principle #35Parameter changes

3Reliability

If constant-dollar instruments with price index adjustment are implemented, then default risk and interest rate risk are reduced, but the instrument complexity increases

Engineering Contradiction:

Improveinterest rate risk reductionVSAvoidinstrument structure

Core Design Contradiction:

ReliabilityVSDevice complexity

Solution Approach 1:

The patent uses a price index (such as CPI) as an intermediary mechanism to automatically adjust instrument terms. This intermediary eliminates the need for complex bilateral negotiations and adjustments between parties, as the index serves as an objective, publicly available reference that both borrower and lender accept, thereby reducing instrument complexity despite the dynamic adjustments.

Inventive Principle:

Principle #24Intermediary (Mediator)

Solution Approach 2:

The patent applies a universal price indexing mechanism that can be used across multiple different financial instruments and contexts. The same indexing approach works for mortgages, bonds, leases, and other funding instruments, creating a standardized framework that reduces complexity through consistency rather than requiring custom solutions for each instrument type.

Inventive Principle:

Principle #6Universality (Multi-functionality)

4Reliability

If financial instruments are tailored to match payments with expected future revenues, then default risk is reduced, but the customization process becomes more complex

Engineering Contradiction:

Improvepayment-revenue matchingVSAvoidinstrument customization

Core Design Contradiction:

ReliabilityVSDevice complexity

Solution Approach 1:

The patent uses parameter changes through price index adjustment to automatically achieve payment-revenue matching. Instead of requiring complex custom analysis of each borrower's specific revenue projections, the standardized indexing parameter automatically adjusts payments to match inflation-adjusted revenue capabilities, reducing customization complexity while maintaining reliability.

Inventive Principle:

Principle #35Parameter changes

Data Source

PatentUS7752105B2Computer-aided process of funding, including a private constant dollar instrument

Publication Date: 2010.07.06 TASK MANAGEMENT

AI summary

A method using a computer system, and a computer system, computing tiered constant dollar instruments to finance a transaction. The method can include associating, with a computer system using input data, a first tier of one or more constant dollar financial instruments that do not finance a transaction and a second tier of one or more constant dollar financial instruments financed by the first tier that do finance the transaction, in producing output to implement the transaction.