An Analysis of the True Notional Bond System Applied to the CBOT T-Bonds Futures

Posted: 12 Dec 2007

See all articles by Ramzi Ben-Abdallah

Ramzi Ben-Abdallah

University of Quebec at Montreal - School of Management - Department of Finance

Michèle Breton

HEC Montreal - Department of Management Sciences

Hatem Ben Ameur

HEC Montreal - Department of Management Sciences

Date Written: December 2007

Abstract

The main purpose of this paper is to apply the True Notional Bond System (TNBS) proposed by Oviedo (2006) for the theoretical pricing of the Chicago Board of Trade Treasury-bond futures, one of the most traded derivatives in the world. This system is proposed as an alternative to the current conversion factor system (CFS), whose poor performance is well known. In this paper, we price the CBOT T-bond futures as well as all its embedded delivery options and compare the corresponding results under the CFS in a stochastic interest rate framework. Our pricing procedure is an adaptation of the Dynamic Programming (DP) algorithm described in Ben-Abdallah et al. (2006), giving the value of the futures contract under the TNBS as a function of time and current short-term interest rate. Numerical illustrations, provided under the Vacisek and CIR models, show that the TNBS reduces dramatically the value of all the delivery options embedded in the CBOT T-bond futures.

Suggested Citation

Ben-Abdallah, Ramzi and Breton, Michèle and Ben Ameur, Hatem, An Analysis of the True Notional Bond System Applied to the CBOT T-Bonds Futures (December 2007). Paris December 2007 Finance International Meeting AFFI-EUROFIDAI Paper. Available at SSRN: https://ssrn.com/abstract=1070781 or http://dx.doi.org/10.2139/ssrn.1070781

Ramzi Ben-Abdallah (Contact Author)

University of Quebec at Montreal - School of Management - Department of Finance ( email )

315 Sainte-Catherine East
Montreal, Quebec H2X 3X2
Canada
(514) 987-3000 # 2821 (Phone)
(514) 987-0422 (Fax)

Michèle Breton

HEC Montreal - Department of Management Sciences ( email )

Montreal, Quebec H3T 2A7
Canada
514-340-6490 (Phone)
514-340-5634 (Fax)

Hatem Ben Ameur

HEC Montreal - Department of Management Sciences ( email )

Montreal, Quebec H3T 2A7
Canada
514-340-6480 (Phone)
514-340-5634 (Fax)

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