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Pricing and quality option in Japanese government bond futures

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  • Bing-Huei Lin
  • Ren-Raw Chen
  • Jian-Hsin Chou
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    Abstract

    An empirical study of the Hull - White model for pricing Treasury bond futures contracts with quality option is presented. Japanese long-term Government Bond (JGB) futures contracts are chosen, because unlike US Treasury bond futures contracts, which embed both the quality and timing options, the JGB contracts contain only the quality option. Interest rate model parameters are estimated using a simple regression technique and the yield curve is smoothed by B-spline functions with a correction for heteroscedasticity. By applying a discrete trinomial tree approach proposed by Hull and White, the quality option embedded in the JGB futures is then determined by the difference between the theoretical futures prices for contracts with and without allowing multiple deliverable grades. Without the addition of other timing options, the value of the pure quality option is less significant compared to those of other empirical studies. It is approximately 0.02 percentage points of par three months prior to delivery. In this study, it is demonstrated that the Hull - White model is simple and computationally efficient.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/096031099332528
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

    Volume (Year): 9 (1999)
    Issue (Month): 1 ()
    Pages: 51-65

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    Handle: RePEc:taf:apfiec:v:9:y:1999:i:1:p:51-65

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    Web page: http://www.tandfonline.com/RAFE20

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    Web: http://www.tandfonline.com/pricing/journal/RAFE20

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    Cited by:
    1. Henrard, Marc, 2006. "Bonds futures and their options: more than the cheapest-to-deliver; quality option and marginning," MPRA Paper 2001, University Library of Munich, Germany.
    2. Kang, Jangkoo & Park, Hyoung-Jin, 2006. "Tests of alternate models for the pricing of Korean Treasury bond futures contracts," Pacific-Basin Finance Journal, Elsevier, vol. 14(4), pages 410-425, September.
    3. Wang, Ping & Liu, Aying & Wang, Peijie, 2004. "Return and risk interactions in Chinese stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(4), pages 367-383, October.
    4. Alejandro balbas & Susana Reichardt, 2006. "On The Future Contract Quality Option: A New Look," Business Economics Working Papers wb063711, Universidad Carlos III, Departamento de Economía de la Empresa.

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