Options in and on interest rate futures contracts: results from martingale pricing theory

U. Cherubini and M. Esposito

Applied Mathematical Finance, 1995, vol. 2, issue 1, 1-16

Abstract: In this paper we address the theoretical problem of evaluating the quality option embedded in interest rate futures contracts. We use the martingale properties of the prices of interest-rate contingent claims under different probability measures in order to derive solutions for the value of futures and options on futures, accounting for the quality option and assuming a square-root model for the short rate. The futures pricing formula boils down to a simple linear combination of the futures prices of the zero-coupon bonds which constitute the deliverable bonds. A European call option on such a futures can be rewritten as an option on a single futures in which the strike price is 'curved', i.e. it is a decreasing function of the short rate.

Keywords: futures; options; quality option; term structure; martingale pricing Cherubini; Esposito (search for similar items in EconPapers)
Date: 1995
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Citations: View citations in EconPapers (4)

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DOI: 10.1080/13504869500000001

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