Bond Futures and Their Options: More than the Cheapest to Deliver; Margining and Quality Option

The Journal of Fixed Income, Vol. 16, No. 2, pp. 62-75, September 2006

Posted: 1 Jul 2009

See all articles by Marc P. A. Henrard

Marc P. A. Henrard

muRisQ Advisory; OpenGamma; University College London - Department of Mathematics

Multiple version iconThere are 3 versions of this paper

Date Written: September 1, 2006

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.

JEL Classification: G13, E43

Suggested Citation

Henrard, Marc P. A., Bond Futures and Their Options: More than the Cheapest to Deliver; Margining and Quality Option (September 1, 2006). The Journal of Fixed Income, Vol. 16, No. 2, pp. 62-75, September 2006. Available at SSRN: https://ssrn.com/abstract=1428436

Marc P. A. Henrard (Contact Author)

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