Transcript Bounds for Treasury Bond Futures Prices and Embedded Delivery
Slide 1
Bounds For Treasury Bond
Futures Prices and Delivery
Options
Ren-Raw Chen and Shih-Kuo Yeh
Comment by: San-Lin Chung
Department of Finance, The Management
School, National Central University, Chung-Li
320, Taiwan. Tel: 886-3-4227424, Fax: 886-34252961, Email: [email protected]
1
Summary
This paper derives the upper bound for the
embedded options (including timing
options and quality option) in T-bond
futures. These upper bounds can be
translated into a lower bound of T-bond
futures price. The authors also show that
the cost of carry model gives an upper
bound of T-bond futures price. The
numerical results show that these bounds
are quite tight – about 2% higher or lower
than the actual futures price.
2
Comments
This paper is well written and contains a very
interesting topic since T-bond futures is a
very popular derivative. I have some
suggestions which are hopefully helpful
to the authors to improve their paper.
1. From figure 1, it seems that the true
futures prices are some times close to the
lower bounds, and some times close to the
upper bounds. It might be interesting to
investigate the possible reasons behind it.
3
2. Since the correlation between T-bond price and
interest rate is negative, the T-bond forward price
will be a upper bound of the T-bond futures price.
The suggested upper bound will be tighter than
the cost of carry model since the cost of carry
model ignores the possibility that the cheapest to
delivery bond may change in the future.
3. 2% error may be a very tight bound for the
option price (premium) but it is quite large to the
futures prices. I wonder how these prices bounds
can be implemented in trading?
4
4. It might be valuable to extend your data
from 1991 to 2001 because the interest
rates go down a lot during the recent
years and it might affect the results.
5
Slide 2
Bounds For Treasury Bond
Futures Prices and Delivery
Options
Ren-Raw Chen and Shih-Kuo Yeh
Comment by: San-Lin Chung
Department of Finance, The Management
School, National Central University, Chung-Li
320, Taiwan. Tel: 886-3-4227424, Fax: 886-34252961, Email: [email protected]
1
Summary
This paper derives the upper bound for the
embedded options (including timing
options and quality option) in T-bond
futures. These upper bounds can be
translated into a lower bound of T-bond
futures price. The authors also show that
the cost of carry model gives an upper
bound of T-bond futures price. The
numerical results show that these bounds
are quite tight – about 2% higher or lower
than the actual futures price.
2
Comments
This paper is well written and contains a very
interesting topic since T-bond futures is a
very popular derivative. I have some
suggestions which are hopefully helpful
to the authors to improve their paper.
1. From figure 1, it seems that the true
futures prices are some times close to the
lower bounds, and some times close to the
upper bounds. It might be interesting to
investigate the possible reasons behind it.
3
2. Since the correlation between T-bond price and
interest rate is negative, the T-bond forward price
will be a upper bound of the T-bond futures price.
The suggested upper bound will be tighter than
the cost of carry model since the cost of carry
model ignores the possibility that the cheapest to
delivery bond may change in the future.
3. 2% error may be a very tight bound for the
option price (premium) but it is quite large to the
futures prices. I wonder how these prices bounds
can be implemented in trading?
4
4. It might be valuable to extend your data
from 1991 to 2001 because the interest
rates go down a lot during the recent
years and it might affect the results.
5
Slide 3
Bounds For Treasury Bond
Futures Prices and Delivery
Options
Ren-Raw Chen and Shih-Kuo Yeh
Comment by: San-Lin Chung
Department of Finance, The Management
School, National Central University, Chung-Li
320, Taiwan. Tel: 886-3-4227424, Fax: 886-34252961, Email: [email protected]
1
Summary
This paper derives the upper bound for the
embedded options (including timing
options and quality option) in T-bond
futures. These upper bounds can be
translated into a lower bound of T-bond
futures price. The authors also show that
the cost of carry model gives an upper
bound of T-bond futures price. The
numerical results show that these bounds
are quite tight – about 2% higher or lower
than the actual futures price.
2
Comments
This paper is well written and contains a very
interesting topic since T-bond futures is a
very popular derivative. I have some
suggestions which are hopefully helpful
to the authors to improve their paper.
1. From figure 1, it seems that the true
futures prices are some times close to the
lower bounds, and some times close to the
upper bounds. It might be interesting to
investigate the possible reasons behind it.
3
2. Since the correlation between T-bond price and
interest rate is negative, the T-bond forward price
will be a upper bound of the T-bond futures price.
The suggested upper bound will be tighter than
the cost of carry model since the cost of carry
model ignores the possibility that the cheapest to
delivery bond may change in the future.
3. 2% error may be a very tight bound for the
option price (premium) but it is quite large to the
futures prices. I wonder how these prices bounds
can be implemented in trading?
4
4. It might be valuable to extend your data
from 1991 to 2001 because the interest
rates go down a lot during the recent
years and it might affect the results.
5
Slide 4
Bounds For Treasury Bond
Futures Prices and Delivery
Options
Ren-Raw Chen and Shih-Kuo Yeh
Comment by: San-Lin Chung
Department of Finance, The Management
School, National Central University, Chung-Li
320, Taiwan. Tel: 886-3-4227424, Fax: 886-34252961, Email: [email protected]
1
Summary
This paper derives the upper bound for the
embedded options (including timing
options and quality option) in T-bond
futures. These upper bounds can be
translated into a lower bound of T-bond
futures price. The authors also show that
the cost of carry model gives an upper
bound of T-bond futures price. The
numerical results show that these bounds
are quite tight – about 2% higher or lower
than the actual futures price.
2
Comments
This paper is well written and contains a very
interesting topic since T-bond futures is a
very popular derivative. I have some
suggestions which are hopefully helpful
to the authors to improve their paper.
1. From figure 1, it seems that the true
futures prices are some times close to the
lower bounds, and some times close to the
upper bounds. It might be interesting to
investigate the possible reasons behind it.
3
2. Since the correlation between T-bond price and
interest rate is negative, the T-bond forward price
will be a upper bound of the T-bond futures price.
The suggested upper bound will be tighter than
the cost of carry model since the cost of carry
model ignores the possibility that the cheapest to
delivery bond may change in the future.
3. 2% error may be a very tight bound for the
option price (premium) but it is quite large to the
futures prices. I wonder how these prices bounds
can be implemented in trading?
4
4. It might be valuable to extend your data
from 1991 to 2001 because the interest
rates go down a lot during the recent
years and it might affect the results.
5
Slide 5
Bounds For Treasury Bond
Futures Prices and Delivery
Options
Ren-Raw Chen and Shih-Kuo Yeh
Comment by: San-Lin Chung
Department of Finance, The Management
School, National Central University, Chung-Li
320, Taiwan. Tel: 886-3-4227424, Fax: 886-34252961, Email: [email protected]
1
Summary
This paper derives the upper bound for the
embedded options (including timing
options and quality option) in T-bond
futures. These upper bounds can be
translated into a lower bound of T-bond
futures price. The authors also show that
the cost of carry model gives an upper
bound of T-bond futures price. The
numerical results show that these bounds
are quite tight – about 2% higher or lower
than the actual futures price.
2
Comments
This paper is well written and contains a very
interesting topic since T-bond futures is a
very popular derivative. I have some
suggestions which are hopefully helpful
to the authors to improve their paper.
1. From figure 1, it seems that the true
futures prices are some times close to the
lower bounds, and some times close to the
upper bounds. It might be interesting to
investigate the possible reasons behind it.
3
2. Since the correlation between T-bond price and
interest rate is negative, the T-bond forward price
will be a upper bound of the T-bond futures price.
The suggested upper bound will be tighter than
the cost of carry model since the cost of carry
model ignores the possibility that the cheapest to
delivery bond may change in the future.
3. 2% error may be a very tight bound for the
option price (premium) but it is quite large to the
futures prices. I wonder how these prices bounds
can be implemented in trading?
4
4. It might be valuable to extend your data
from 1991 to 2001 because the interest
rates go down a lot during the recent
years and it might affect the results.
5
Bounds For Treasury Bond
Futures Prices and Delivery
Options
Ren-Raw Chen and Shih-Kuo Yeh
Comment by: San-Lin Chung
Department of Finance, The Management
School, National Central University, Chung-Li
320, Taiwan. Tel: 886-3-4227424, Fax: 886-34252961, Email: [email protected]
1
Summary
This paper derives the upper bound for the
embedded options (including timing
options and quality option) in T-bond
futures. These upper bounds can be
translated into a lower bound of T-bond
futures price. The authors also show that
the cost of carry model gives an upper
bound of T-bond futures price. The
numerical results show that these bounds
are quite tight – about 2% higher or lower
than the actual futures price.
2
Comments
This paper is well written and contains a very
interesting topic since T-bond futures is a
very popular derivative. I have some
suggestions which are hopefully helpful
to the authors to improve their paper.
1. From figure 1, it seems that the true
futures prices are some times close to the
lower bounds, and some times close to the
upper bounds. It might be interesting to
investigate the possible reasons behind it.
3
2. Since the correlation between T-bond price and
interest rate is negative, the T-bond forward price
will be a upper bound of the T-bond futures price.
The suggested upper bound will be tighter than
the cost of carry model since the cost of carry
model ignores the possibility that the cheapest to
delivery bond may change in the future.
3. 2% error may be a very tight bound for the
option price (premium) but it is quite large to the
futures prices. I wonder how these prices bounds
can be implemented in trading?
4
4. It might be valuable to extend your data
from 1991 to 2001 because the interest
rates go down a lot during the recent
years and it might affect the results.
5
Slide 2
Bounds For Treasury Bond
Futures Prices and Delivery
Options
Ren-Raw Chen and Shih-Kuo Yeh
Comment by: San-Lin Chung
Department of Finance, The Management
School, National Central University, Chung-Li
320, Taiwan. Tel: 886-3-4227424, Fax: 886-34252961, Email: [email protected]
1
Summary
This paper derives the upper bound for the
embedded options (including timing
options and quality option) in T-bond
futures. These upper bounds can be
translated into a lower bound of T-bond
futures price. The authors also show that
the cost of carry model gives an upper
bound of T-bond futures price. The
numerical results show that these bounds
are quite tight – about 2% higher or lower
than the actual futures price.
2
Comments
This paper is well written and contains a very
interesting topic since T-bond futures is a
very popular derivative. I have some
suggestions which are hopefully helpful
to the authors to improve their paper.
1. From figure 1, it seems that the true
futures prices are some times close to the
lower bounds, and some times close to the
upper bounds. It might be interesting to
investigate the possible reasons behind it.
3
2. Since the correlation between T-bond price and
interest rate is negative, the T-bond forward price
will be a upper bound of the T-bond futures price.
The suggested upper bound will be tighter than
the cost of carry model since the cost of carry
model ignores the possibility that the cheapest to
delivery bond may change in the future.
3. 2% error may be a very tight bound for the
option price (premium) but it is quite large to the
futures prices. I wonder how these prices bounds
can be implemented in trading?
4
4. It might be valuable to extend your data
from 1991 to 2001 because the interest
rates go down a lot during the recent
years and it might affect the results.
5
Slide 3
Bounds For Treasury Bond
Futures Prices and Delivery
Options
Ren-Raw Chen and Shih-Kuo Yeh
Comment by: San-Lin Chung
Department of Finance, The Management
School, National Central University, Chung-Li
320, Taiwan. Tel: 886-3-4227424, Fax: 886-34252961, Email: [email protected]
1
Summary
This paper derives the upper bound for the
embedded options (including timing
options and quality option) in T-bond
futures. These upper bounds can be
translated into a lower bound of T-bond
futures price. The authors also show that
the cost of carry model gives an upper
bound of T-bond futures price. The
numerical results show that these bounds
are quite tight – about 2% higher or lower
than the actual futures price.
2
Comments
This paper is well written and contains a very
interesting topic since T-bond futures is a
very popular derivative. I have some
suggestions which are hopefully helpful
to the authors to improve their paper.
1. From figure 1, it seems that the true
futures prices are some times close to the
lower bounds, and some times close to the
upper bounds. It might be interesting to
investigate the possible reasons behind it.
3
2. Since the correlation between T-bond price and
interest rate is negative, the T-bond forward price
will be a upper bound of the T-bond futures price.
The suggested upper bound will be tighter than
the cost of carry model since the cost of carry
model ignores the possibility that the cheapest to
delivery bond may change in the future.
3. 2% error may be a very tight bound for the
option price (premium) but it is quite large to the
futures prices. I wonder how these prices bounds
can be implemented in trading?
4
4. It might be valuable to extend your data
from 1991 to 2001 because the interest
rates go down a lot during the recent
years and it might affect the results.
5
Slide 4
Bounds For Treasury Bond
Futures Prices and Delivery
Options
Ren-Raw Chen and Shih-Kuo Yeh
Comment by: San-Lin Chung
Department of Finance, The Management
School, National Central University, Chung-Li
320, Taiwan. Tel: 886-3-4227424, Fax: 886-34252961, Email: [email protected]
1
Summary
This paper derives the upper bound for the
embedded options (including timing
options and quality option) in T-bond
futures. These upper bounds can be
translated into a lower bound of T-bond
futures price. The authors also show that
the cost of carry model gives an upper
bound of T-bond futures price. The
numerical results show that these bounds
are quite tight – about 2% higher or lower
than the actual futures price.
2
Comments
This paper is well written and contains a very
interesting topic since T-bond futures is a
very popular derivative. I have some
suggestions which are hopefully helpful
to the authors to improve their paper.
1. From figure 1, it seems that the true
futures prices are some times close to the
lower bounds, and some times close to the
upper bounds. It might be interesting to
investigate the possible reasons behind it.
3
2. Since the correlation between T-bond price and
interest rate is negative, the T-bond forward price
will be a upper bound of the T-bond futures price.
The suggested upper bound will be tighter than
the cost of carry model since the cost of carry
model ignores the possibility that the cheapest to
delivery bond may change in the future.
3. 2% error may be a very tight bound for the
option price (premium) but it is quite large to the
futures prices. I wonder how these prices bounds
can be implemented in trading?
4
4. It might be valuable to extend your data
from 1991 to 2001 because the interest
rates go down a lot during the recent
years and it might affect the results.
5
Slide 5
Bounds For Treasury Bond
Futures Prices and Delivery
Options
Ren-Raw Chen and Shih-Kuo Yeh
Comment by: San-Lin Chung
Department of Finance, The Management
School, National Central University, Chung-Li
320, Taiwan. Tel: 886-3-4227424, Fax: 886-34252961, Email: [email protected]
1
Summary
This paper derives the upper bound for the
embedded options (including timing
options and quality option) in T-bond
futures. These upper bounds can be
translated into a lower bound of T-bond
futures price. The authors also show that
the cost of carry model gives an upper
bound of T-bond futures price. The
numerical results show that these bounds
are quite tight – about 2% higher or lower
than the actual futures price.
2
Comments
This paper is well written and contains a very
interesting topic since T-bond futures is a
very popular derivative. I have some
suggestions which are hopefully helpful
to the authors to improve their paper.
1. From figure 1, it seems that the true
futures prices are some times close to the
lower bounds, and some times close to the
upper bounds. It might be interesting to
investigate the possible reasons behind it.
3
2. Since the correlation between T-bond price and
interest rate is negative, the T-bond forward price
will be a upper bound of the T-bond futures price.
The suggested upper bound will be tighter than
the cost of carry model since the cost of carry
model ignores the possibility that the cheapest to
delivery bond may change in the future.
3. 2% error may be a very tight bound for the
option price (premium) but it is quite large to the
futures prices. I wonder how these prices bounds
can be implemented in trading?
4
4. It might be valuable to extend your data
from 1991 to 2001 because the interest
rates go down a lot during the recent
years and it might affect the results.
5