Affine Models, Credit Spreads and the Delivery Option of a Multi-Issuer Bond Future

Bühler, Wolfgang; Düllmann, Klaus; Windfuhr, Marc

doi:10.2139/ssrn.276192

Cited by 2 publications

(1 citation statement)

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“…Under the previous assumptions and following, for instance, Ritchken and Sankarasubramanian (1992, Equation 4.2, p. 205) while borrowing the notation from Bühler, Düllmann, and Windfuhr (2001), it is well known that the time-t fair price of a bond futures contract with an embedded quality option, that matures at time and is written…”

Section: Quality Option Conceptmentioning

confidence: 99%

Multifactor and analytical valuation of treasury bond futures with an embedded quality option

Nunes¹,

Oliveira²

2007

Journal of Futures Markets

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A closed-form pricing solution is proposed for the quality option embedded in Treasury bond futures contracts, under a multifactor and D. Heath, R. Jarrow, and A. Morton (1992) Gaussian framework. Such an analytical solution can be obtained through a conditioning approximation, in the sense of M. Curran (1994) and L. Rogers and Z. Shi (1995), or via a rank 1 approximation, following A. Brace and M. Musiela (1994). Monte Carlo simulations show that both approximations are extremely accurate and easy to calculate.Application of the proposed pricing model to the EUREX market from January 2000 through May 2004, yields an excellent fit and an insignificant estimate of the quality option magnitude. On average, this delivery option accounts for only of the futures prices.The timing option is usually found to be less important than the quality option and arises whenever the futures seller is allowed to select the moment (during the delivery month) that delivery takes place. This is the case for the CBOT futures contracts but not for the EUREX bond futures covered by this article because for the latter, delivery must take place on the 10th calendar day of each (quarterly) delivery month. 2 Such an approach includes, for instance, the analysis of Gay and Manaster (

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Section: Quality Option Conceptmentioning

confidence: 99%