Bonds futures and their options: more than the cheapest-to-deliver; quality option and marginning
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.
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- Marc Henrard, 2003. "Explicit bond option and swaption formula in Heath-Jarrow-Morton one factor model," Finance 0310009, EconWPA.
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World Scientific Publishing Co. Pte. Ltd..
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- Marc Henrard, 2006. "A Semi-Explicit Approach to Canary Swaptions in HJM One-Factor Model," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(1), pages 1-18. Full references (including those not matched with items on IDEAS)
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