Pricing the Chicago Board of Trade T-Bond futures

Ramzi Ben-Abdallah, Hatem Ben-Ameur and Michèle Breton

Quantitative Finance, 2012, vol. 12, issue 11, 1663-1678

Abstract: The aim of this paper is to investigate the pricing of the Chicago Board of Trade (CBOT) Treasury-Bond futures. The difficulty in pricing it arises from its multiple inter-dependent embedded delivery options, which can be exercised at various times and dates during the delivery month. We consider a general Markov diffusion process model for stochastic interest rates and propose a pricing algorithm that can handle all the delivery rules embedded in the CBOT T-Bond futures. Our procedure combines dynamic programming, finite-elements approximation, and fixed-point evaluation. Numerical illustrations are provided under the one-factor Vasicek and Cox--Ingesoll--Ross models, and under the time in-homogeneous Hull--White model.

Date: 2012
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DOI: 10.1080/14697688.2011.573496

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