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Isolating The Wild Card Option

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  • Hugh Cohen

Abstract

Many embedded options are difficult to value the wild card option in the Treasury bond futures contract is one of these embedded options. We illustrate how narrow theoretical bounds on the value of this option, relative to the price of the contract, may be obtained in the presence of other embedded options. Simulations suggest that the value of the wild card option is close to zero. This implies that, in this economy, a simpler pricing model of the Treasury bond futures contract, which ignores the wild card option, will result in only a small loss of accuracy.

Suggested Citation

  • Hugh Cohen, 1995. "Isolating The Wild Card Option," Mathematical Finance, Wiley Blackwell, vol. 5(2), pages 155-165, April.
    • Handle: RePEc:bla:mathfi:v:5:y:1995:i:2:p:155-165
    DOI: 10.1111/j.1467-9965.1995.tb00107.x
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    Cited by:

    1. Francesca Biagini & Tomas Björk, 2007. "On The Timing Option In A Futures Contract," Mathematical Finance, Wiley Blackwell, vol. 17(2), pages 267-283, April.
    2. Michèle Breton & Ramzi Ben‐Abdallah, 2018. "Time is money: An empirical investigation of delivery behavior in the U.S. T‐Bond futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(1), pages 22-37, January.
    3. Kristoffer Lindensjö, 2016. "The End of the Month Option and Other Embedded Options in Futures Contracts," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 23(1), pages 69-83, March.
    4. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.
    5. 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.

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