Multifactor and analytical valuation of treasury bond futures with an embedded quality option
✍ Scribed by João Pedro Vidal Nunes; Luís Alberto Ferreira De Oliveira
- Publisher
- John Wiley and Sons
- Year
- 2007
- Tongue
- English
- Weight
- 317 KB
- Volume
- 27
- Category
- Article
- ISSN
- 0270-7314
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✦ Synopsis
Abstract
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. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:275–303, 2007