I have never heard of a market for stock swaps, but until a few weeks ago I had never heard about a market for credit default swaps. It seems the latter are real, or at least there is real trading activity in credit default swaps. So far as I know, there are no Stock Swaps. Nevertheless, this fictitious activity will be our example to explain BEDM.

Why not demonstrate BEDM with a real application? The answer is simple, I want to explain BEDM but not draw attention to the fact that a plausible demonstration for a real application must be designed with the help of an expert in that domain.  I am qualified to tell you about BEDM but if you press me for details about data sharing between covert agencies or about the ramifications of HIPPA in practice I’ll show my ignorance. At the end of the day, BEDM is a data processing service like an SQL database server or a Goggle search engine. A data processing service can support diverse applications so long as each application is operated by a domain expert. This demo will teach you the principles of operation for BEDM. Armed with that knowledge, you can see how to apply BEDM to an application that is near and dear to you.

If the demo fails in that, let me know. Otherwise, think of BEDM as high tech plumbing. I’m your plumber, I’m not going to give you medical advice.

The stock swaps in this example work analogously to currency swaps. In the example, we swap only the stocks that are included in the Dow Jones Industrial Average, DJIA. 

In a stock swap, one party asks to exchange a certain number of shares in one Dow Jones stock for a cash-equivalent number of shares in another Dow Jones stock. This party, called the “buyer” offers cash as an incentive for another party, called the “seller” to enter into a stock swap agreement. A stock swap agreement has a term of a defined number of months. At the end of the term, the swap is reversed thereby closing the transaction. The second party keeps the cash paid by the first party when the swap was initiated. The actual profits and losses depend on the market changes during the term of the swap and each party bears the risks of the position it assumes.

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