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Pricing the Chicago Board of Trade T-Bond futures

  • Ramzi Ben-Abdallah
  • Hatem Ben-Ameur
  • Mich�le Breton
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    The aim of this paper is to investigate the pricing of the Chicago Board of Trade (CBOT) Treasury-Bond futures. The difficulty in pricing it arises from its multiple inter-dependent embedded delivery options, which can be exercised at various times and dates during the delivery month. We consider a general Markov diffusion process model for stochastic interest rates and propose a pricing algorithm that can handle all the delivery rules embedded in the CBOT T-Bond futures. Our procedure combines dynamic programming, finite-elements approximation, and fixed-point evaluation. Numerical illustrations are provided under the one-factor Vasicek and Cox--Ingesoll--Ross models, and under the time in-homogeneous Hull--White model.

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    Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

    Volume (Year): 12 (2012)
    Issue (Month): 11 (November)
    Pages: 1663-1678

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    Handle: RePEc:taf:quantf:v:12:y:2012:i:11:p:1663-1678
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