Processing binary options in future exchange clearing
Systems and methods are disclosed for processing binary options (also referred to as digital options) in existing clearing systems, such as futures clearing systems. The binary option is treated, or processed, similar to standard options on a non-tradeable cash-settled underlying futures contract. A hypothetical instrument, referred to as a book instrument is created to facilitate clearing of the binary option. The book instrument has an expiration date after the expiration of the binary option, such as the day after the expiration of the binary option. For each binary option that expires in the money, a transaction is created for the book instrument future. The underlying book future has an assigned price that is a fixed amount less that the final price for the underlying statistical or actual value of the binary option at expiration. Transactions are loaded in the clearing system and processed and all positions are liquidated. Options exercise and assignment processing is performed in the clearing system as well as an associated clearing firm bookkeeping system.
1. A method of processing a binary option based on an underlying instrument and having an expiration date, the method comprising:
(a) creating a book instrument in a clearing computer system based on the binary option and having a book instrument expiration date after the binary option expiration date;
(b) after the binary option expiration date, conducting a liquidating transfer transaction for the binary option in the clearing computer system;
(c) after the binary option expiration date and prior to the book instrument expiration date, determining in the clearing computer system whether the binary option expired in the money; and
(d) based on the binary option expiring in the money, and prior to the book instrument expiration date, loading into the clearing computer system a transaction for the book instrument at a fixed price different from a final value of the underlying instrument.
2. The method of claim 1 , wherein the binary option comprises a binary option contract.
3. The method of claim 1 , wherein the underlying instrument comprises a futures contract.
4. The method of claim 1 , wherein the book instrument comprises a non-tradeable cash-settled underlying contract.
5. The method of claim 1 , wherein the fixed price in (d) is one U.S. dollar.
6. The method of claim 1 , wherein (d) comprises generating a cash flow corresponding to a payout of the binary option.