IDEAS home Printed from https://ideas.repec.org/a/bla/jfinan/v41y1986i1p195-207.html
   My bibliography  Save this article

Valuation and Optimal Exercise of the Wild Card Option in the Treasury Bond Futures Market

Author

Listed:
  • Kane, Alex
  • Marcus, Alan J

Abstract

The Chicago Board of Trade Treasury Bond Futures Contract allows the short position several delivery options as to when and with which bond the contract will be settled. The timing option allows the short position to choose any business day in the delivery month to make delivery. In addition, the contract settlement price is locked in at 2:00 p.m. when the futures market closes, despite the facts that the short position need not declare an intent to settle the contract until 8:00 p.m. and that trading in Treasury bonds car, occur all day in dealer markets. If bond prices change significantly between 2:00 and 8:00 p.m., the short has the option of settling the contract at a favorable 2:00 p.m. price. This phenomenon, which recurs on every trading day of the delivery month, creates a sequence of 6-hour put options for the short position which has been dubbed the "wild card option." This paper presents avaluation model for the wild card option and computes estimates of the value of that option, as well as rules for its optimal exercise.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Kane, Alex & Marcus, Alan J, 1986. " Valuation and Optimal Exercise of the Wild Card Option in the Treasury Bond Futures Market," Journal of Finance, American Finance Association, vol. 41(1), pages 195-207, March.
  • Handle: RePEc:bla:jfinan:v:41:y:1986:i:1:p:195-207
    as

    Download full text from publisher

    File URL: http://links.jstor.org/sici?sici=0022-1082%28198603%2941%3A1%3C195%3AVAOEOT%3E2.0.CO%3B2-E&origin=repec
    File Function: full text
    Download Restriction: Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kilcollin, Thomas Eric, 1982. " Difference Systems in Financial Futures Markets," Journal of Finance, American Finance Association, vol. 37(5), pages 1183-1197, December.
    2. Gay, Gerald D. & Manaster, Steven, 1984. "The quality option implicit in futures contracts," Journal of Financial Economics, Elsevier, vol. 13(3), pages 353-370, September.
    3. Garbade, Kenneth D & Silber, William L, 1983. "Futures Contracts on Commodities with Multiple Varieties: An Analysis of Premiums and Discounts," The Journal of Business, University of Chicago Press, vol. 56(3), pages 249-272, July.
    4. Phillips, Susan M. & Smith, Clifford Jr., 1980. "Trading costs for listed options : The implications for market efficiency," Journal of Financial Economics, Elsevier, vol. 8(2), pages 179-201, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dan W. French & Edwin D. Maberly, 1992. "Early Exercise Of American Index Options," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 15(2), pages 127-137, June.
    2. David C. Ling, 1993. "Mortgageā€Backed Futures and Options," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(1), pages 47-67, March.
    3. Merrick, John Jr & Naik, Narayan Y. & Yadav, Pradeep K., 2005. "Strategic trading behavior and price distortion in a manipulated market: anatomy of a squeeze," Journal of Financial Economics, Elsevier, vol. 77(1), pages 171-218, July.
    4. Stanton, Richard, 2000. "From cradle to grave: How to loot a 401(k) plan," Journal of Financial Economics, Elsevier, vol. 56(3), pages 485-516, June.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jfinan:v:41:y:1986:i:1:p:195-207. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley Content Delivery). General contact details of provider: http://edirc.repec.org/data/afaaaea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.