Bonds futures and their options: more than the cheapest-to-deliver; quality option and marginning

Marc Henrard

MPRA Paper from University Library of Munich, Germany

Abstract: Even if the name futures indicates a simple instrument, bond futures are complex. Several special features are embedded in the instrument. In particular the future is not written on one specific bond but on a basket of bonds, from which the short side can deliver the cheapest. This paper focuses on that feature, present in the main futures market, and its impact on the futures risk. A formula for the delivery option and the convexity adjustment due to the daily margining is proposed in the Gaussian HJM model. The approach is numerically very efficient and easy to implement. Based on this result a futures option formula is derived. The approach is similar to the one used for Canary swaptions.

Keywords: Bond future; option on bond futures; delivery option; marginning; Gaussian HJM model; explicit formula; numerical integration (search for similar items in EconPapers)
JEL-codes: E43 G13 (search for similar items in EconPapers)
Date: 2006-05
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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