the following description is provided to enable any person skilled in the art to make and use the invention and sets forth the best modes contemplated by the inventor of carrying out his invention . various modifications , however , will remain readily apparent to those skilled in the art , since the general principles of the present invention have been defined herein specifically to provide new finite equity - based financial instruments . the new finite equity instruments disclosed herein are the earnings swap and the earnings future . these instruments are based on the financial ( economic ) performance or results of a designated company or group of selected companies . financial or economic results basically describes the earnings or losses of the company or companies . financial results can be expressed in terms of income , net income or in terms of any other customary accounting calculation . the financial data necessary for operation of these instruments normally comes from public disclosures of the company or companies . the basis on the company or companies may be indirect in that the instruments can also be referenced to the proportion of earning or loss of the company / companies allocated to a particular security ( e . g ., stock shares or a particular class of shares ). in an earnings swap counterparties a and b ( each a “ counterparty ”) enter into a swap agreement which , for example , can be governed under the guidelines of the international swap dealers association ( isda ). the earnings swap references earnings of an underlying company ; this can also be expressed in terms of the earning allocated to a particular security - for instance a specific class of shares of a specific public company (“ company ”). at predetermined times the counterparties exchange payments . one counterparty pays a fixed amount and the other pays a specified percentage (“ earnings multiplier ”) of the after - tax net income and dividends ( or the fraction thereof allocable to the reference shares ), as reported by the company in its quarterly financial statements . following is an example of the terms and conditions of an earnings swap according to the present invention : example of payments : if in the calculation period from ( and including ) may 28 , 2006 to ( but excluding ) aug . 28 , 2006 , the net income is $ 80 , 000 , 000 and no dividends are distributed , then the counterparty b payment shall be 0 . 0030 ×$ 80 , 000 , 000 =$ 240 , 000 . by exchanging payments the payments are effectively netted , the resulting cash flow under the swap is a net payment of $ 10 , 000 ($ 250 , 000 less $ 240 , 000 ) from counterparty a to counterparty b two business days after aug . 28 , 2006 . it will be appreciated that if the parties set the multiplier and fixed payment so that the payments of counterparty b are expected to equal the fixed payment of counterparty a , and the underlying company underperforms counterparty a will pay counterparty b . similarly , if the underlying company overperforms , counterparty b will pay counterparty b . thus , with this financial instrument counterparty b can hedge against underperformance of the underlying company . the precise fixed payments and earnings multipliers selected will reflect the assessment of each party of how the underlying company is likely to perform over the life of the earnings swap . provisions must be adopted to cover the case in which aberrational circumstances affect the regular quarterly reporting of net income in accordance with its regularly scheduled quarterly periods , pursuant to united states securities laws : 1 . restatement of net income — if there is a restatement of net income , then future payments under the earnings swap must be adjusted at the payment date immediately following the restatement , to compensate for the incorrect payments , which have occurred in the past . by way of example , if in october 2007 it is announced by the company that the net income reported in the calculation period ending aug . 28 , 2006 is restated upward to $ 100 , 000 , 000 , then the counterparty b payment of $ 240 , 000 , which occurred two business days thereafter must be adjusted upwards by $ 60 , 000 from $ 240 , 000 to $ 300 , 000 . as a consequence $ 60 , 000 must be added to the counterparty b payment , which is due two business days after the calculation period ending nov . 28 , 2007 . the counterparties may agree at the outset that any such adjustment payments occurring as a result of a net income restatement be grossed up at libor ( london inter - bank offer rate ) or to some similar index to compensate the receiving counterparty for the time value of money . at the outset of the transaction , the counterparties must agree on provisions to handle the case in which net income that occurred during the earnings swap is restated after the maturity date . the counterparties may agree that once the maturity date is reached , all payments are irrevocable so that no adjustments can be made to the payments under the swap , even if restatements of net income that occurred during the swap are later declared . another reasonable approach is to allow for some a time of 6 - 12 months after the maturity date — any restatements occurring within this time will give rise to retroactive adjustments in the earnings swap . 2 . delay in reporting — if the company delays its reporting of net income in a given quarter , then payments on the earnings swap are to be suspended until such time that the company announces its net income . payments should occur on the originally scheduled payment dates , but payments should be increased by adding on interest accrued at libor to compensate the counterparties for the time value of money . if earnings announcements are delayed past the maturity date , then the swap should be extended to accommodate this delay in reporting . for example , if the net income which under ordinary reporting schedules would have been reported in the calculation periods ending in august 2008 and november 2009 do not occur , then the counterparties should keep the earnings swap in effect until such time that the net income for those quarters is eventually reported . 3 . permanent cessation due to bankruptcy or other form of permanent winding down — if the company permanently winds down and as a consequence announces that it will no longer issue any financial reports , then under these circumstances it is to be assumed for the purposes of the earnings swap that all future counterparty b payments are zero . the earnings swap can continue with regular payments by counterparty a and zero payments on the part of counterparty b . as an alternative , the counterparties can agree to terminate the earnings swap with a lump - sum payment from counterparty a to counterparty b , representing the fair value of all future cash flows . 4 . permanent cessation due to merger or acquisition — to cover the case in which company ceases to report its net income due to merger with or acquisition by another company , the counterparties must have provisions in place describing how the remaining cash flows in the swap are to be treated . here are several possible alternatives . a ) early termination — the earnings swap simply terminates , with no further obligations on the part of either counterparty to make any further payments . the advantage to this method is its simplicity . the disadvantage is that it does not reflect the potential earnings the company would have had after the merger or acquisition took place . b ) determination of implied future net income — in the case of a merger or acquisition (“ transaction ”), the value transferred to owners of the underlying company ( either in the form of cash , stock or other securities or assets ) in consideration for their equity stake in the company will be specifically determinable in a relatively straightforward manner . if the value is transferred in cash , then such value will be wholly explicit . if the value is transferred in stock , then the value of such stock can be observed at a specified time on the day of the closing of the transaction . the value so determined will be referred to as the purchase price ( even though transaction might not be an outright purchase ) once the purchase price is established , implied future net income is to be determined for the purpose of establishing the payments of the remaining calculation periods in the earnings swap . one reasonable method for determining implied future new income is the constant growth rate mechanism . this mechanism assumes that net income of the underlying company will grow at a constant rate for the foreseeable future and then remain constant thereafter . the purchase price ( p ), the initial net income ( i ), the discount factors ( dt ), the initial annual growth rate ( g ) and the number of years ( n ) of net income growth , satisfy the following formula : p = i *( σ ( 1 + g ) t * d t )+ i *( σ ( 1 + g ) n * d t ), where the first summation is take for t = 1 , 2 , . . . , n and the second summation is taken for t = n + 1 , n + 2 , . . . ( ad infinitum ). the first summation represents n years of constant net income growth and the second summation represents the remaining years with zero growth and net income held constant at i *( 1 + g ) n . 1 ). frequency of payments — the swap payments and calculation periods can occur semi - annually or annually , or for that matter at any time intervals , regular or irregular , as agreed upon by the counterparties . quarterly was used for illustration purposes only . semi - annual or annual payments may be necessary in foreign jurisdictions where earnings are reported less frequently . 2 ). alteration of fixed payment leg — the payments of counterparty a can be expressed in other terms , for example as a function of libor or any other floating rate . 3 ). forward - starting transactions — the swap can start immediately upon transacting or at some future some date . for example , counterparties which enter into the transaction in 2004 can agree that the earnings swap is in effect from 2008 to 2011 . an earnings future , which is an exchange - traded instrument , settles at maturity to a price based on financial performance of an underlying company ( or companies ) over the life of the instrument . for example , the maturity price could equal to the sum of , for example , all net income and dividends earned by the company or allocable to all or some subset of the shares of the company taken from the inception of the earnings future to its maturity date . thus , price of the instrument is based on the earnings future of a company . during the life of the instrument it is traded on a futures exchange at a negotiated price reflective of the ultimate expected price at maturity . for example , if traders determines that the maturity price will be high ( that is the company is doing well and will continue to do well ), the selling price of the instrument will be bid up . the price at which a given investor buys or sells depends on the investor &# 39 ; s analysis of future earning as reflected by performance of the company to date . as the maturity date gets closer and closer , the final determination of the maturity price becomes more certain as there are fewer outstanding financial reports . it is anticipated that the instrument price will reflect the likely maturity value . at maturity of the future earnings instrument the holders of the instrument must pay the maturity price ( the settlement value , see below ) and the instrument ceases to exist just like an ordinary futures contract . in actual practice the purchase and sales prices and the settlement value would be handled through the trader &# 39 ; s margin accounts . choose a scaling factor of 1 , 000 , 000 = 10 6 , so restatement of earnings if there is any restatement of earnings after the settlement date , earnings , then there shall be no adjustment to the settlement value . if there is a restatement of earnings before , that shall effect the corresponding adjustment to the settlement value of the instrument . failure to report : if for some reason the company does not report its quarterly results , then trading in the future earnings instrument can continue , but the ultimate settlement price still needs to reflect a full five years ( or other selected period ) worth of net income and dividends . thus , the exchange may have to postpone the settlement date if the company delays its reporting . if the company goes into bankruptcy , is wound down , merged or is acquired by another company , and therefore is in a position where it will no longer issue any net income and dividend data , then special provisions need to be devised , similar to those discussed in the earnings swap , above . for example , in the case of bankruptcy , future net income and dividends can be marked down to zero . in the case of a merger or acquisition , the implied future net income and dividends can be determined using the purchase price and a constant growth model , as described above . variations : the maturity of the contract can be some length of time other than 5 years , such as 2 years , 10 years or 30 years . 1 . rather than using net income , the participants in a finite equity product may choose to strip out any extra - ordinary income and tailor the product so that is linked only to net income from operations . similarly taxes may be stripped out so that the finite equity product is linked only to pre - tax income . 2 . baskets — the aforementioned instruments can be easily be based on a plurality of companies , that is , a basket of various companies . such a transaction would effectively be a sum of the individual aforementioned transactions combined into one . 3 . classes of shares — the aforementioned instruments can be easily modified so that the net income and dividends to be considered are limited to only a single class of shares of stock in the underlying company , or a specific subset of shares , rather than all of its shares . for example , the earnings swap or the earnings future can be linked only to the net income and dividends allocable to class a shares of company xyz . the following claims are thus to be understood to include what is specifically illustrated and described above , what is conceptually equivalent , what can be obviously substituted and also what essentially incorporates the essential idea of the invention . those skilled in the art will appreciate that various adaptations and modifications of the just - described preferred embodiment can be configured without departing from the scope of the invention . the illustrated embodiment has been set forth only for the purposes of example and that should not be taken as limiting the invention . therefore , it is to be understood that , within the scope of the appended claims , the invention may be practiced other than as specifically described herein .