Pricing the Chicago Board of Trade T-Bond futures

Ben-Abdallah, Ramzi; Ben‐Ameur, Hatem; Breton, Michèle

doi:10.1080/14697688.2011.573496

Cited by 5 publications

(2 citation statements)

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“…R Ben-Abdallah, H Ben-Ameur and M Bretor (2012) took into account the option to choose time and the option to choose bonds for the treasury bond futures contract pricing and used Vasicek model, CIR model and HW models for modeling the spot interest rate to give Numerical solution of treasury bond futures prices. The study found that in the two months before the delivery time, the market price of treasury bond futures is lower on average about 2% than the theoretical price, indicating that if the HW model is suitable for the modeling of interest rates, the market overestimated the value of the option selected bonds [14].…”

Section: Futures Pricing Theoriesmentioning

confidence: 99%

A Literature Review of Treasury Bond Futures Pricing and Arbitrage Method

Wang¹,

Yu²,

Liu³

2015

Proceedings of the 2015 International Conference on Engineering Management, Engineering Education and Information Technology

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Abstract.5-year and 10-year term treasury bond futures were launched officially in September 6, 2013 and March 20, 2015, marking the interest rate futures re-board the stage of history. Academic study of treasury bond futures gradually becomes a hot issue, this article describes the difficult and hot issues at home and abroad from the aspects of futures pricing theory, the relationship between the spot and arbitrage.

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Section: Futures Pricing Theoriesmentioning

confidence: 99%

A Literature Review of Treasury Bond Futures Pricing and Arbitrage Method

Wang¹,

Yu²,

Liu³

2015

Proceedings of the 2015 International Conference on Engineering Management, Engineering Education and Information Technology

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“…There is not much literature on the exercise of the strategic timing options embedded in the U.S. T‐Bond futures, and most of it is concerned with their pricing in conjunction with the quality option (see, for instance, Ben‐Abdallah, Ben‐Ameur, & Breton, ; Biagini & Björk, ; Boyle, ; Chen & Yeh, ; Chen, Ju, & Yeh, ; Cohen, ; Hedge, ; Hemler, ; Kane & Marcus, ). However, because of the complexity arising from taking all the embedded delivery options into account simultaneously, not much has been said about the optimal timing strategy, apart from rules of thumb that have been suggested for early delivery (see Burghardt, Belton, Lane, & Papa, ; Choudhry, ).…”

Section: Introductionmentioning

confidence: 99%

Time is money: An empirical investigation of delivery behavior in the U.S. T‐Bond futures market

Breton

Ben-Abdallah²

2017

Journal of Futures Markets

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Funding information NSERCThis paper analyzes the delivery behavior observed in the CBOT T-Bond futures market over the period spanning 1985-2016 in order to assess how timing decisions were made, and whether these decisions were optimal. During that period, delivery was generally deferred to the last possible moment, but early delivery episodes were also observed regularly. A regression model identifying the determinants of early exercise over the last three decades is proposed, along with a case-by-case analysis of specific delivery patterns. Finally, the optimality of the observed delivery strategies is assessed a posteriori. J E L C L A S S I F I C A T I O N C61, C63, G12, G13 | INTRODUCTIONThe Treasury Bond futures contract traded on the Chicago Board of Trade (CBOT T-Bond futures hereafter) is one of the most liquid, transparent, and actively traded futures contracts in the world, making it an instrument of choice for hedging long-term interest-rate-risk exposure. This contract calls for the delivery of the $100,000 face value of a long-term government bond bearing a 6% coupon rate. 1 Because the underlying notional bond does not generally trade in the marketplace, the short trader is offered the option to choose which bond to deliver among a deliverable set fixed by the exchange (the delivery basket). This delivery privilege is called the quality option. However, since the characteristics of the deliverable issues may differ substantially from those of the notional bond, and in order to make the delivery fair for both parties, the futures price received by the short trader is adjusted according to the quality of the T-Bond actually delivered. To do so, the CBOT uses a set of conversion factors, defined as the prices of the eligible T-Bonds computed on the first possible delivery day, under the assumption that the yield curve is flat at a level fixed at 6% per annum with semiannual compounding. This assumption is generally not representative of the market conditions, resulting in a conversion-factor-system bias that intensifies as the discrepancy widens between the assumed yield curve (flat at 6%) and the one currently observed. The conversion factor system thus fails to make eligible T-Bonds equal for delivery; the Treasury security that maximizes the short trader's economic profit is commonly known as the cheapest-to-deliver bond (CTD). 2 In the U.S. Treasury bond futures market, in addition to the quality option, short traders enjoy so-called timing 1 Prior to March 2000, the coupon rate of the notional bond was equal to 8% and has since then been reduced to 6%.2 For an in-depth discussion of the imperfections of the CBOT conversion-factor system, and the risk of and possible mitigations for conversion-factor risk, options, which allow them to deliver on any business day during a delivery month. 3 The quality and timing options offered to the short trader aim to alleviate the demand that would be triggered by the futures market on a single issue or on a single delivery day, thereby reducing the likeli...

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To Squeeze or Not to Squeeze? That Is No Longer the Question

Ben-Abdallah

Breton

2015

Journal of Futures Markets

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This paper provides an investigation into an anomaly called a short squeeze, in the CBOT T-Bonds Futures Market, for the period spanning January 1985 to December 2014. A short squeeze occurs when market manipulations cause the cheapest-to-deliver bond to be in short supply, resulting in significant price distortions. The incentive for market manipulation, or squeeze potential, is evaluated over the last 30 years and is related to documented episodes of the CBOT futures market. It is observed that conditions are presently very favorable to the occurrence of short squeezes, and that shortages would imply large losses for short traders. We also find that the incentive for market manipulation would be significantly reduced by lowering the notional underlying security coupon rate.

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Pricing the Chicago Board of Trade T-Bond futures

Cited by 5 publications

References 40 publications

A Literature Review of Treasury Bond Futures Pricing and Arbitrage Method

A Literature Review of Treasury Bond Futures Pricing and Arbitrage Method

Time is money: An empirical investigation of delivery behavior in the U.S. T‐Bond futures market

To Squeeze or Not to Squeeze? That Is No Longer the Question

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