Options on overnight futures

Model Development, muRisQ Advisory, March 2022

12 Pages Posted: 8 Apr 2022

See all articles by Marc P. A. Henrard

Marc P. A. Henrard

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

Date Written: March 28, 2022

Abstract

With the transitions to overnight benchmarks as the main benchmarks in some currencies, futures based on overnight rates are becoming more common. The most traded futures on overnight rates settle against compounded rates. The pricing of those futures requires some convexity adjustments with an Asian flavour due to the composition. Together with the greater liquidity of those futures came the market for options on futures. The options are traded with the usual futures daily margin mechanisms and can be standard options or mid-curve options; the options themselves are European or American. The pricing of those options, require different adjustments for the margin and composition features. In this note we propose the pricing of those options in the Gaussian HJM framework.

Keywords: overnight, futures, convexity adjusment, transition

JEL Classification: G13, G15, G23, K12

Suggested Citation

Henrard, Marc P. A., Options on overnight futures (March 28, 2022). Model Development, muRisQ Advisory, March 2022, Available at SSRN: https://ssrn.com/abstract=4068731 or http://dx.doi.org/10.2139/ssrn.4068731

Marc P. A. Henrard (Contact Author)

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