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Quality Option in Treasury Bond Futures-Pricing and Application

Author: DuPeiJun
Tutor: ChenRong
School: Xiamen University
Course: Financial Engineering
Keywords: Treasury Bond Futures Quality Option CTD
CLC: F724.5
Type: Master's thesis
Year: 2014
Downloads: 13
Quote: 0
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Abstract


The quality option implicit in treasury bond futures contract allows the short position to satisfy the contract by delivering one of a variety of specified bonds. As before the delivery day, knowledge of which of the allowed bonds will be cheapest at delivery is uncertain, then the quality option will have value. Besides, as the quality option is owned by the short position, the greater the value of the option, the lower will be the futures price. The existence of quality option makes great significance to treasury bond futures’ pricing and application. This paper concentrates on pricing of quality option and treasury bond futures, and proposing some trading strategies on treasury bond futures based on pricing. In addition, this paper has studied the change of treasury bond futures’ duration to the yield of treasury bond. Through research in this paper, we get some conclusions below. First, in the current situation, the quality option implicit in treasury bond futures is near to zero. Second, pricing the treasury bond futures using BDT is effective. Finally, the return structure of the basis of each delivery bonds is similar to different options of interest rate and investors can choose one suitable for themselves. At last, the research in this paper also presents that the duration of the treasury bond futures is a curve with Periodical decline and flatness occurred between intervals

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CLC: > Economic > Trade and Economic > China's domestic trade and economic > Circulation of commodities > Futures Trading
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