Investment Vehicle Hedging via Option Offset and Investor Segmentation
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Solution Overview
Problem
Investment vehicles face challenges in effectively managing and hedging risks across multiple currencies and asset classes, particularly in maintaining desired credit ratings and achieving diversification while minimizing costs, as existing strategies often require significant equity reserves and limit vehicle size due to currency and prepayment risks.
Innovation Solution
The method involves purchasing options, such as currency swaptions, to hedge risks and offsetting the costs by selling corresponding options, structuring cash flows and security priorities to protect preferred investors while transferring risks to non-protected investors, thereby reducing the overall cost of hedging and allowing for larger investment vehicle sizes with improved diversification.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If options are purchased to hedge risks in an investment vehicle, then protection against currency and prepayment risks is improved, but the cost of hedging increases and limits vehicle size
Solution Approach 1:
The patent applies this principle by selling options to non-protected investors, converting the harmful cost of hedging into a beneficial revenue stream. The proceeds from selling these options directly offset the cost of purchasing protection options, thereby financing the risk management strategy without burdening protected investors while maintaining full risk protection.
2Reliability
If equity reserves are increased to manage risks, then credit ratings are maintained, but the vehicle size is limited and returns are reduced
Solution Approach 1:
The patent introduces non-protected investors as intermediaries who absorb the risks through purchased options. This mediator structure allows the investment vehicle to maintain credit ratings and risk management standards without requiring large equity reserves, thereby enabling larger vehicle sizes and improved returns while protecting the core investor base.
3Loss of energy
If options are sold to offset hedging costs, then the cost burden on protected investors is reduced, but risks are transferred to non-protected investors
Solution Approach 1:
The patent segments the investor base into protected and non-protected categories with different risk exposures. Protected investors receive full risk protection through purchased options without bearing the cost, while non-protected investors voluntarily purchase options to assume specific risks. This segmentation allows cost reduction for protected investors while clearly defining and allocating risk exposure to appropriate parties.
Data Source
AI summary
A method for managing an investment vehicle. An option is purchased for protection of cash flows to be paid by the investment vehicle to designated investors. An option is sold offsetting the purchased option at least in part. The cash flows and security priorities of the investment vehicle are structured so that the purchased option protects the protected investors, and the proceeds of the sale of the sold option offsets the cost of the purchased option for benefit of non-protected investors.