Terms Structure of Interest Rates and Implicit Options: The Case of Japanese Bond Futures

Yu, Shang-Wu

doi:10.1111/1468-5957.00123

Cited by 2 publications

(4 citation statements)

References 25 publications

(42 reference statements)

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“…Another possibility consists in pricing the option as the profit obtained by the future seller due to the difference of prices between the bond he/she finally delivers and the one he/she would deliver when the future was sold (Kane and Marcus 1986, Barnhill 1990, Hedge 1990, Hemler 1990or Stickland 1992. The most usual way prices the option at any date before the future maturity as the difference between the theoretical future price of the cheapest to deliver bond and the future price reflected by the market (Hedge 1990, Hemler 1990, Stickland 1992, Yu 1997). We will also follow this approach though, as will be justified, we will not draw on the cheapest to deliver asset.…”

Section: Introductionmentioning

confidence: 99%

“…We will also follow this approach though, as will be justified, we will not draw on the cheapest to deliver asset. The last method indicated by Chance and Hemler prices the option by using the cash flows of a roll-over strategy that buys a (theoretical) future contract on the cheapest to deliver bond and sells the future contract (Barnhill and Seale 1988, Barnhill 1990, Hedge 1990or Yu 1997and 1999.…”

Section: Introductionmentioning

confidence: 99%

“…More complex models of the TSIR dynamics (Hull andWhite 1990, Heath et al 1992, etc. ) are used in Paxon (1993) and, Sankarasubramanian (1992) and, Yu (1997), Chen et al (1999) or Nunes and Ferreira (2003). This paper will attempt to price the quality option by drawing on the standard methods of Pricing Theory, but the imposed assumptions will be as simple as possible.…”

Section: Introductionmentioning

confidence: 99%

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On the future contract quality option: a new look

Balbás

Reichardt

2010

Applied Financial Economics

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The paper provides a new method to replicate and price the quality options usually embedded in many future contracts. The replicating strategies may draw on both the future contract and its related calls and puts. They also yield the quality option theoretical price in perfect markets, as well as upper and lower bounds for its bid or ask prices if frictions are incorporated. With respect to previous literature, this new approach seems to reflect four contributions: Firstly, the analysis does not depend on any dynamic assumption concerning the TSIR behaviour, secondly, it incorporates the information contained in calls and puts whose underlying security is the future contract, thirdly, it allows us to use real market perfectly synchronized prices, and fourthly, transaction costs can be considered. The paper presents an empirical test involving the German market that reveals some differences with regard to previous studies. Abstract. The paper provides a new method to replicate and price the quality options usually embedded in many future contracts. The replicating strategies may draw on both the future contract and its related calls and puts. They also yield the quality option theoretical price in perfect markets, as well as upper and lower bounds for its bid or ask prices if frictions are incorporated. With respect to previous literature, this new approach seems to reflect four contributions: Firstly, the analysis does not depend on any dynamic assumption concerning the TSIR behaviour, secondly, it incorporates the information contained in calls and puts whose underlying security is the future contract, thirdly, it allows us to use real market perfectly synchronized prices, and fourthly, transaction costs can be considered. The paper presents an empirical test involving the German market that reveals some differences with regard to previous studies. Keywords

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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On the future contract quality option: a new look

Balbás

Reichardt

2010

Applied Financial Economics

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“…We have considered the investment strategies involving the Euro-Schatz Future contract, the Euro-4 There are several alternatives for pricing the quality option. As discussed in Balbás and Reichardt (2010) the usual way prices the option at any date before the future maturity as the difference between the theoretical future price of the cheapest to deliver bond and the future price reflected by the market (Hedge, 1990;Hemler, 1990;Stickland, 1992;Yu, 1997).…”

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confidence: 99%

Interest Rate Future Quality Options and Negative Interest Rates

Balbás

Laborda

2018

JFI

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This paper verifies the existence of diversification gains from considering the "quality option asset strategy", which adds the portfolio replicating the interest rate future quality option, as proposed by Balbás and Reichardt (2010), and a portfolio comprised of stock and bonds. The empirical results show that the gains are statistically and economically significant, especially in the negative one-month Euribor rate period. The out-of-sample optimal tangency portfolio, which includes WORKING PAPERS

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Terms Structure of Interest Rates and Implicit Options: The Case of Japanese Bond Futures

Cited by 2 publications

References 25 publications

On the future contract quality option: a new look

On the future contract quality option: a new look

Interest Rate Future Quality Options and Negative Interest Rates

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