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

15 Pages Posted: 8 Feb 2006

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: January 25, 2006

Abstract

Even if the name futures indicate 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 choose the cheapest-to-deliver.

This paper focus 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, HJM gaussian 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 (January 25, 2006). Available at SSRN: https://ssrn.com/abstract=881741 or http://dx.doi.org/10.2139/ssrn.881741

Marc P. A. Henrard (Contact Author)

muRisQ Advisory ( email )

Rue du Chemin de fer, 8
Brussels, 1210
Belgium

HOME PAGE: http://murisq.com

OpenGamma ( email )

Albert House
256-260 Old Street
London, EC1V 9DD
United Kingdom

University College London - Department of Mathematics ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
3,532
rank
2,670
Abstract Views
11,620
PlumX Metrics