The Quality Delivery Option in Treasury Bond Futures Contracts

Hemler, Michael L.

doi:10.2307/2328750

Cited by 38 publications

(44 citation statements)

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“…3 See e.g., Hemler (1990) 4 See e.g., Cox, Ingersoll, and Ross (1981) More precisely, this is the difference between the last trading price observed before t i and the last price observed within the interval [t i , t i + ∆t), where ∆t equals five minutes. We assume that this price change can be written as a linear function of distinct pieces of news arriving during this period.…”

Section: Monthsmentioning

confidence: 99%

Surprises in Scheduled Macroeconomic Announcements: Why Do They Move the Bond Market?

Hess

2003

SSRN Journal

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Section: Monthsmentioning

confidence: 99%

Surprises in Scheduled Macroeconomic Announcements: Why Do They Move the Bond Market?

Hess

2003

SSRN Journal

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“…So, Margrave (1978), Gay and Manaster (1984) Boyle (1989), Hemler (1990), Bellier (1997) or Anderson and Martínez-Garmendia (1999), develop a theory to price the option allowing its buyer to change two previously fixed securities. 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).…”

Section: Introductionmentioning

confidence: 99%

“…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%

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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“…It also points out some new applications such as the pricing of variable-rate corporate debt. Hemler (1990) models the quality delivery option in treasury bond futures contracts as an exchange option. Shevlin (1991) investigates the valuation of R&D firms with R&D limited partnerships.…”

Section: Introductionmentioning

confidence: 99%

The impact of return nonnormality on exchange options

2008

Journal of Futures Markets

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The Margrabe formula is used extensively by theorists and practitioners not only on exchange options, but also on executive compensation schemes, real options, weather and commodity derivatives, etc. However, the crucial assumption of a bivariate normal distribution is not fully satisfied in almost all applications. The impact of nonnormality on exchange options is studied by using a bivariate Gram-Charlier approximation. For near-the-money exchange options, skewness and coskewness induce price corrections which are linear in moneyness, while kurtosis and cokurtosis induce quadratic price corrections. The nonnormality helps to explain the implied correlation smile observed in practice.

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The Quality Delivery Option in Treasury Bond Futures Contracts

Cited by 38 publications

References 0 publications

Surprises in Scheduled Macroeconomic Announcements: Why Do They Move the Bond Market?

Surprises in Scheduled Macroeconomic Announcements: Why Do They Move the Bond Market?

On the future contract quality option: a new look

The impact of return nonnormality on exchange options

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