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Empirical tests of valuation models for options on t-note and t-bond futures

✍ Scribed by Nusret Cakici; Sris Chatterjee; Avner Wolf

Publisher: John Wiley and Sons
Year: 1993
Tongue: English
Weight: 716 KB
Volume: 13
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.3990130102

No coin nor oath required. For personal study only.

✦ Synopsis

If the cost-of-carry relationship holds, then (A3) is consistent with the assumption that the spot price of the underlying commodity also follows a stochastic differential equation given by:

where p = a -( ra), r = riskless interest rate, and 6 represents the dividend yield (or its analog) on the spot commodity. In the case of T-Bond and T-Note futures, the basic cost-of-carry relationship is further complicated by the presence of delivery options which include quality and timing options. [See Boyle (1989) for details.] Therefore, the stochastic differential equation for the price of the spot commodity will be more complex than eq. (2) and cannot be specified easily.

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