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The quality option in the treasury bond futures market: An empirical assessment

The quality option in the treasury bond futures market: An empirical assessment We gratefully acknowledge financial aid from the Futures Center. Graduate School of Business, Columbia University. We’ve also benefited from discussions with Bob McDonald and Dan Siegel. Alex Kane is an Associate Professor of Finance in the School of Management at Boston University. Alan J . Marcus is a n Associate Professor of Finance in the School of Management at Boston University. The Journal of Futures Markets, Vol. 6. Nu. 2 , 231-248 (1986) 0 1986 by John W i l q & Sons, Iric. CCC 0270-7314/86/020231-1 8t04.00 profits or losses on the contract, will depend upon the bond used as the delivery vehicle. The delivering short-side trader has a quality option: he can choose to settle the contract with the bond that maximizes profits. When future interest rates are stochastic and many bonds are eligible as delivery vehicles, the bond which actually will be chosen is unknown and hence the conversion factor cannot be determined with certainty at the time the contract is established (despite the fact that the factor for any particular eligible bond is a constant, and the currently cheapest to deliver T-bond is always known). Because the optimal delivery bond can change over time, the http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Futures Markets Wiley

The quality option in the treasury bond futures market: An empirical assessment

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References (12)

Publisher
Wiley
Copyright
Copyright © 1986 Wiley Periodicals, Inc., A Wiley Company
ISSN
0270-7314
eISSN
1096-9934
DOI
10.1002/fut.3990060206
Publisher site
See Article on Publisher Site

Abstract

We gratefully acknowledge financial aid from the Futures Center. Graduate School of Business, Columbia University. We’ve also benefited from discussions with Bob McDonald and Dan Siegel. Alex Kane is an Associate Professor of Finance in the School of Management at Boston University. Alan J . Marcus is a n Associate Professor of Finance in the School of Management at Boston University. The Journal of Futures Markets, Vol. 6. Nu. 2 , 231-248 (1986) 0 1986 by John W i l q & Sons, Iric. CCC 0270-7314/86/020231-1 8t04.00 profits or losses on the contract, will depend upon the bond used as the delivery vehicle. The delivering short-side trader has a quality option: he can choose to settle the contract with the bond that maximizes profits. When future interest rates are stochastic and many bonds are eligible as delivery vehicles, the bond which actually will be chosen is unknown and hence the conversion factor cannot be determined with certainty at the time the contract is established (despite the fact that the factor for any particular eligible bond is a constant, and the currently cheapest to deliver T-bond is always known). Because the optimal delivery bond can change over time, the

Journal

The Journal of Futures MarketsWiley

Published: Jun 1, 1986

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