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Bonds Futures and Their Options: More than the Cheapest-to-Deliver; Quality Option and Marginning

Posted: 7 Nov 2006  

Marc P. A. Henrard

OpenGamma; University College London - Department of Mathematics

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., Bonds Futures and Their Options: More than the Cheapest-to-Deliver; Quality Option and Marginning. Journal of Fixed Income, Vol. 16, No. 2, pp. 62-75, Fall 2006. Available at SSRN: https://ssrn.com/abstract=942668

Marc P. A. Henrard (Contact Author)

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

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