Index-Offset Deposit Product Valuation via Segmented Allocations
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Solution Overview
Problem
Current equity-linked deposit products face challenges in offering an attractive combination of equity-linkage and fixed-income-linkage while guaranteeing a specified percentage of principal, due to limitations such as lack of fixed-income linkage and lower-than-desired participation rates, especially during times of low interest rates or high equity index volatility.
Innovation Solution
A computer-based method for determining the value of an index-offset deposit product, which notionally allocates principal to both equity-linked and fixed-income-linked allocations, ensuring a specified percentage of principal is guaranteed and allowing for offsetting of positive and negative index credit components, using a system that sets trial values for fixed-income-linked crediting parameters and determines the cost of an equity option to meet the guaranteed amount, along with the present value of principal and fixed-income-linked crediting components.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If equity-indexed call options are used to achieve equity participation and guarantee principal, then principal protection and equity linkage are improved, but the ability to earn attractive interest rates deteriorates
Solution Approach 1:
The deposit product is segmented into two distinct notional allocations: an equity-linked allocation and a fixed-income-linked allocation. This segmentation allows each allocation to be independently managed and credited, enabling the product to simultaneously provide principal protection through the fixed-income portion while capturing equity gains through the equity-linked portion, thereby resolving the contradiction between principal guarantee and interest rate earning.
Solution Approach 2:
The invention merges equity-indexed call options with fixed-income instruments into a single integrated deposit product structure. By combining these two previously separate investment vehicles, the product achieves both equity participation (through the call options) and fixed-income stability (through the bonds or mortgages), allowing the holder to earn attractive interest rates while maintaining principal protection.
2Productivity
If participation rates are increased to capture equity gains, then equity linkage benefit is improved, but the guarantee of principal deteriorates
Solution Approach 1:
By segmenting the deposit into separate notional allocations, the invention isolates the equity participation risk from the principal guarantee obligation. The fixed-income-linked allocation ensures principal protection regardless of equity market performance, while the equity-linked allocation captures gains without compromising the guaranteed portion, thus resolving the contradiction between high participation rates and principal guarantee.
3Adaptability or versatility
If fixed-income linkage is added to equity-indexed products, then combination of equity-linkage and fixed-income-linkage is improved, but product complexity increases
Solution Approach 1:
The invention simplifies the complex combination of equity and fixed-income linkages by using clear segmentation into separate notional allocations. Each allocation has distinct crediting parameters and is managed independently, making the product structure more transparent and easier to price and administer, thereby reducing the practical complexity despite the enhanced versatility.
Data Source
AI summary
A computer-based method for determining a value of an index-offset deposit product, having a principal amount P, a term T, a specified guaranteed amount G, and an index credit C, comprising:d) setting trial values for fixed-income-linked crediting parameters for said product implying an expected fixed-income-linked credit component F at the end of the term T;e) determining a cost for an equity option paying equity-linked credit component E such that the index credit C=E+F, to be paid at T, together with the principal P, is at least equal to G; andf) summing said equity option cost, present value of principal, and present value of fixed-income-linked credit component to determine said value of said index-offset deposit product.