Spot Price Tracker Index Using Linear Extrapolation

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Solution Overview

Problem

Existing financial trading systems face challenges in accurately tracking and valuing spot prices for indices and derivative instruments, particularly in maintaining equal-dollar weighting and reflecting market changes, which can lead to inefficiencies in index adjustments and derivative settlements.

Innovation Solution

A spot price tracker index is calculated using linear extrapolation from two futures contracts with the closest maturities, allowing for the creation of a price tracker index that closely follows the variations of economic variables like the VIX, commodities, or other indexes, facilitating cash settlement and improving market reflection.

Engineering Contradictions & Design Principles

VSEngineering Contradiction Analysis

1Stability of the object's composition

If equal-dollar weighted indices are used with periodic re-adjustments, then the index maintains equal weighting of components, but the complexity of index adjustments increases and timing delays occur

Engineering Contradiction:

Improveequal weighting stabilityVSAvoidindex adjustment complexity

Core Design Contradiction:

Stability of the object's compositionVSDevice complexity

Solution Approach 1:

The system pre-calculates and stores the equal-dollar weight for each index component in advance, so that during periodic re-adjustments, the weight calculation is already completed and only needs to be applied. This eliminates complex real-time calculations during adjustment periods while maintaining equal weighting stability.

Inventive Principle:

Principle #10Preliminary action

2Reliability

If component stocks are replaced when weights drop below threshold, then the index continues to reflect the intended market sector, but the frequency of adjustments increases and timing delays occur

Engineering Contradiction:

Improveindex market reflection accuracyVSAvoidadjustment timing delay

Core Design Contradiction:

ReliabilityVSLoss of time

Solution Approach 1:

The system continuously monitors component weights and automatically triggers replacement actions when weights drop below predetermined thresholds. This feedback mechanism ensures the index reliably reflects the intended market sector without manual intervention delays, as the system self-corrects weight imbalances promptly.

Inventive Principle:

Principle #23Feedback

3Loss of information

If spot prices are tracked using traditional methods, then the index reflects market performance, but the accuracy in capturing spot price variations deteriorates

Engineering Contradiction:

Improvespot price information accuracyVSAvoidspot price tracking precision

Core Design Contradiction:

Loss of informationVSMeasurement precision

Solution Approach 1:

The patent introduces futures contracts as an intermediary instrument to track spot prices. By using the relationship between futures and spot prices, the system indirectly captures spot price movements with higher precision than direct tracking methods, reducing information loss while maintaining measurement accuracy.

Inventive Principle:

Principle #24Intermediary (Mediator)

Data Source

PatentUS8321322B2Method and system for creating a spot price tracker index

Publication Date: 2012.11.27 CBOE EXCHANGE INC

AI summary

A method and system for creating a spot price tracker index is disclosed. The method includes obtaining values of first and second derivatives at a time t and calculating an index value by linear extrapolation from the first and second futures contracts. The index value may be displayed at a trading facility and quotes based on the index value may be transmitted by the trading facility to a market participant.