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UPSIDE FORWARD WITH EARLY FUNDING
PROVISION
FIELD OF THE INVENTION
The present invention generally relates to a system for and method of securing capital. More particularly, the invention relates to a derivative financial instrument that can provide value prior to maturation.
DESCRIPTION OF RELATED ART
Financial instruments generally designed to provide funding to entities are known. In particular, an entity may raise capital by issuing debt instruments, such as corporate bonds, or by issuing equity instruments, such as stocks. More exotic financial instruments, such as financial derivatives, also exist.
A "plain vanilla" forward contract is one type of financial derivative. With such a forward, a first party agrees to purchase a quantity of financial instruments from a second party on some future date. The forward generally specifies both the date on which the purchase must occur and an agreed-upon price of the financial instruments. Forwards are generally custom-drafted instruments between two parties.
A second type of financial instrument is a range forward. A range forward is similar to a plain vanilla forward, except that the prices of the financial instruments at the conclusion of the contract are allowed to float to a limited extent. Thus, for example, a party may contract to sell a quantity of stock at a date in the future, where the selling price is partially dependent on the market price of the stock on that date.
Range forwards lack a mechanism for the selling party to extract value from the transaction prior to the contract maturity date without unwinding (and therefore canceling) the entire contract. In existing products, a party that wishes to receive value prior to the contract conclusion date must unwind the contract (e.g., cancel the contract and disengage from the associated trades), and rely on the other party's determination of fair market value to construct a separate transaction. In determining a fair market value, the other party will generally base its assessment on parameters such as interest rates, borrow costs, dividends, and volatility that may include subjective components. Thus, the valuation could vary materially depending on the party conducting the analysis. Moreover, as the other party is not contractually bound to unwind the contract prior to maturity, the party that wishes to receive value will be in no position to demand a better price. Thus, a party holding the short position in a range forward is limited to subjective, financially inefficient, and potentially expensive techniques for obtaining value prior to the contract's conclusion. In short, current products lack the ability to provide a party with value during the contract term without unwinding the transaction and relying on a fair market value calculation.
SUMMARY OF THE INVENTION
The present invention has many advantages over the prior art. For example, certain embodiments of the present invention allow entities to raise capital using a financial derivative that allows extraction of value prior to the contract maturity date. Entities taking the short position in such contracts, e.g., issuers of the underlying financial instruments, may extract value prior to the contract's conclusion. This provides for highly flexible funding timing, as a party taking the short position in a contract according to such embodiments may obtain value at any time prior to the contract's expiration.
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Such embodiments do not require unwinding the contract and subjecting it to a fair market value calculation and negotiation in order to extract value prior to the maturity date.
According to certain embodiments of the invention, enti
5 ties may raise capital on a flexible schedule while limiting loss should the underlying financial instruments experience a drop in market value. Thus, such entities may benefit, to a limited extent, from market gains in the underlying financial instruments to obtain an upside without the risk of a sizable
10 downside. Such entities benefit from any upside less than a ceiling price, while a floor price protects issuers from adverse market turns.
Embodiments of the present invention may be used to obtain funds using a company's own stock as the underlying financial instruments. Such embodiments provide for favorable accounting treatment of the capital raised while avoiding stock dilution. That issuers may benefit from an expected upside creates a perception in the market of issuer optimism.
2Q Thus, certain embodiments of the present invention may be used by an issuer to raise capital while simultaneously projecting a bullish market message regarding its stock.
According to an embodiment of the present invention, a method of obtaining funding is disclosed. The method
25 includes contracting for sale of a first quantity of financial instruments on a maturity date in exchange for a price, where the price and/or the first quantity are at least partially dependant on a market price of the first quantity of financial instruments at a delivery date, the delivery being to an entity. The
30 method also includes delivering, in accordance with the step of contracting, a second quantity of the financial instruments at a time prior to the maturity date to the entity. The method also includes receiving value for the second quantity of financial instruments from the entity, the step of receiving value
35 being in accordance with the step of contracting. The method also includes calculating a maturity balance using a computer, where the step of calculating comprises accounting for the first quantity of financial instruments and accounting for the second quantity of financial instruments.
40 Various optional features of the above embodiment include the following. The price may comprise a predetermined ceiling price if a market price of the quantity of financial instruments at the maturity date is greater than the ceiling price, a predetermined floor price if the market price of the quantity of
45 financial instruments at the maturity date is less than the floor price, and a market price of the quantity of financial instruments at the maturity date if the market price of the quantity of financial instruments at the maturity date lies between the ceiling price and the floor price. The ceiling price and the floor
50 price may be determined at the step of contracting. The method may include issuing the financial instruments. The value may comprises a present value of a floor price of the second quantity of financial instruments. The second quantity may less than the first quantity. Compensation may be
55 received, the compensation comprising a difference between a ceiling price and a floor price for the second quantity of financial instruments if a market price of the second quantity of financial instruments at the delivery date is greater than the ceiling price, zero if the market price of the second quantity of
60 financial instruments at the delivery date is less than the floor price, and a difference between the market price of the second quantity of financial instruments at the delivery date and the floor price for the second quantity of financial instruments if the market price of the second quantity of financial instru
65 ments at the delivery date lies between the ceiling price and the floor price for the second quantity of financial instruments.
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According to an embodiment of the present invention, a method of providing funding is disclosed. The method includes contracting with an entity to purchase a first quantity of financial instruments on at least one predetermined future date for a price, the price and/or first quantity being at least 5 partially dependant on a market price of the first quantity of financial instruments at a delivery date. The method also includes hedging a position, using a computer, the position defined at least partially by the contracting step. The method also includes buying, in accordance with the contracting step, 10 a second quantity of the financial instruments from the entity at a time prior to the predetermined future date.
Various optional features of the above embodiment include the following. The step of hedging may include dynamic hedging. The price may comprise a predetermined ceiling 15 price if a market price of the quantity of financial instruments at the maturity date is greater than the ceiling price, a predetermined floor price if the market price of the quantity of financial instruments at the maturity date is less than the floor price, and a market price of the quantity of financial instru- 20 ments at the maturity date if the market price of the quantity of financial instruments at the maturity date lies between the ceiling price and the floor price. The ceiling price and the floor price may be determined at the step of contracting. The entity may issue the financial instruments. The step of buying may 25 include buying for a present value of a floor price of the second quantity of financial instruments. The second quantity may be less than the first quantity. The compensation may comprise a difference between a ceiling price and a floor price for the second quantity of financial instruments if a market 30 price of the second quantity of financial instruments at the maturity date is greater than the ceiling price, zero if the market price of the second quantity of financial instruments at the maturity date is less than the floor price, and a difference between the market price of the second quantity of financial 35 instruments at the maturity date and the floor price for the second quantity of financial instruments if the market price of the second quantity of financial instruments at the maturity date lies between the ceiling price and the floor price for the second quantity of financial instruments. 40
According to an embodiment of the present invention, a method of obtaining funding is disclosed. The method includes contracting for sale of a first quantity of financial instruments on a maturity date in exchange for a price, where the price and/or the first quantity are at least partially depen- 45 dant on a market price of the first quantity of financial instruments at a delivery date, the delivery being to an entity. The method also includes offering to the entity, in accordance with the step of contracting, a second quantity of the financial instruments at a time prior to the maturity date. The method 50 also includes calculating, using a computer, a maturity balance, the step of calculating comprising accounting for the first quantity of financial instruments and accounting for the second quantity of financial instruments.
Various optional features of the above embodiment include 55 the following. The price may comprise a predetermined ceiling price if a market price of the quantity of financial instruments at the maturity date is greater than the ceiling price, a predetermined floor price if the market price of the quantity of financial instruments at the maturity date is less than the floor 60 price, and a market price of the quantity of financial instruments at the maturity date if the market price of the quantity of financial instruments at the maturity date lies between the ceiling price and the floor price. The ceiling price and the floor price may be determined at the step of contracting. The 65 method may include issuing the financial instruments. The method may include receiving an acceptance of an offer, the
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offer arising from the step of offering, delivering, in accordance with the step of contracting and in accordance with the step of offering, the second quantity of the financial instruments at a time prior to the maturity date to the entity, and receiving value for the second quantity of financial instruments from the entity, the step of receiving value being in accordance with the step of contracting. The value may include a present value of a floor price of the second quantity of financial instruments. The second quantity may be less than the first quantity. The method may include paying compensation, the compensation comprising a difference between a ceiling price and a floor price for the second quantity of financial instruments if a market price of the second quantity of financial instruments at the maturity date is greater than the ceiling price, zero if the market price of the second quantity of financial instruments at the maturity date is less than the floor price, and a difference between the market price of the second quantity of financial instruments at the maturity date and the floor price for the second quantity of financial instruments if the market price of the second quantity of financial instruments at the maturity date lies between the ceiling price and the floor price for the second quantity of financial instruments.
According to an embodiment of the present invention, a method of providing funding is provided. The method includes contracting with an entity to purchase a first quantity of financial instruments on a predetermined future date for a price, the price and/or first quantity being at least partially dependant on a market price of the first quantity of financial instruments at a delivery date. The method also includes hedging a position, using a computer, the position defined at least partially by the contracting step. The method also includes receiving an offer to buy, in accordance with the contracting step, a second quantity of the financial instruments from the entity at a time prior to the predetermined future date.
Various optional features of the above embodiment include the following. The step of hedging may include dynamic hedging. The price may comprise a predetermined ceiling price if a market price of the quantity of financial instruments at the maturity date is greater than the ceiling price, a predetermined floor price if the market price of the quantity of financial instruments at the maturity date is less than the floor price, and a market price of the quantity of financial instruments at the maturity date if the market price of the quantity of financial instruments at the maturity date lies between the ceiling price and the floor price. The ceiling price and the floor price may be determined at the step of contracting. The entity may issue the financial instruments. The method may include accepting the offer to buy, receiving, in accordance with the step of contracting and in accordance with the step of offering, the second quantity of the financial instruments at a time prior to the maturity date to the entity, and delivering value for the second quantity of financial instruments to the entity, the step of delivering value being in accordance with the step of contracting. The step of delivering value may include delivering a present value of a floor price of the second quantity of financial instruments. The second quantity may be less than the first quantity. The method may further include paying compensation, the compensation comprising a difference between a ceiling price and a floor price for the second quantity of financial instruments if a market price of the second quantity of financial instruments at the maturity date is greater than the ceiling price, zero if the market price of the second quantity of financial instruments at the maturity date is less than the floor price, and a difference between the market price of the second quantity of financial instruments at
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