Declining Balance Futures Pricing for Unrealized Value Isolation
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Solution Overview
Problem
Current financial instruments, such as futures contracts, often obscure the economic variable being traded by referencing cumulative total indexes, which include both realized and unrealized values, making it difficult to focus on forward-looking components and manage risks effectively.
Innovation Solution
Implementing a declining balance methodology (DBM) that successively adjusts daily settlement prices and administers cash payments to isolate the unrealized portion of the cumulative sum, allowing the financial instrument to reflect only the undetermined economic variables, thereby removing irrelevant information and preserving the original economic consideration of the trade.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Loss of information
If cumulative total indexes are used to construct financial instruments, then the complete historical data is captured, but the economic variable being traded becomes obscured and difficult to understand
Solution Approach 1:
The patent segments the cumulative index into two distinct parts: the realized portion (historical data) and the unrealized portion (forward-looking component). By separating these components, the system allows traders to focus on the unrealized portion that represents the actual economic variable being traded, while the realized portion is excluded from the trading instrument. This segmentation resolves the contradiction by improving information clarity without oversimplifying the underlying data structure.
Solution Approach 2:
The patent extracts and removes the realized portion of the cumulative index from the trading instrument. By taking out the historical data that has already been priced in, the system prevents this stale information from obscuring the economic variable being traded. This extraction process maintains the完整性 of the original cumulative data while eliminating the harmful effect of including realized values in the trading instrument.
2Reliability
If cumulative indexes including realized values are used, then complete data is available, but risk management becomes difficult due to inclusion of stale information
Solution Approach 1:
The patent segments the cumulative index into realized and unrealized portions, allowing the trading instrument to focus exclusively on the unrealized portion that matters for future risk management. This segmentation improves reliability by ensuring that traders are only exposed to the forward-looking component that represents actual future risk, while the realized portion is excluded to prevent misleading risk assessments.
Solution Approach 2:
Instead of starting with the complete cumulative index and trying to filter out realized values, the patent inverts the approach by constructing the trading instrument to include only the unrealized portion from the beginning. This inversion fundamentally changes the structure to prioritize risk management needs by default, making the instrument inherently focused on future risks rather than requiring complex filtering mechanisms.
3Measurement precision
If daily settlement prices are adjusted to reflect only unrealized portions, then price clarity is improved, but calculation complexity increases
Solution Approach 1:
The patent applies preliminary action by pre-calculating and separating the realized portion of the cumulative index before constructing the daily settlement prices. By performing this separation in advance, the system establishes a clear baseline that simplifies subsequent daily pricing calculations. The unrealized portion is identified and isolated beforehand, making the daily settlement price adjustments more straightforward and precise without requiring complex real-time calculations.
Solution Approach 2:
The patent introduces an intermediary mechanism that acts as a bridge between the complete cumulative index and the simplified trading instrument. This intermediary process systematically separates the realized and unrealized portions and manages the transition from the raw cumulative data to the refined pricing structure. The intermediary mechanism handles the calculation complexity in a structured way, allowing precise price reflection of unrealized values while managing the computational burden through a systematic approach.
Data Source
AI summary
Systems and method are disclosed for quoting, adjusting and settling futures contracts by successively removing the just-realized variables from the quoted futures price to focus the quoted contract value to the remaining unrealized economic variables. Further, such systems and method for quoting, adjusting and settling the futures contracts preserve the underlying economic consideration for the trade when compared with the traditional way of quoting futures based on the same cumulative sum.