A New Method for Valuing Treasury Bond Futures Options - download pdf or read online

By Ehud I. Ronn

ISBN-10: 0943205158

ISBN-13: 9780943205151

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A New Method for Valuing Treasury Bond Futures Options option has three weeks to expiration. Portfolios were formed for each available striking price having positive open interest and trading volume. The empirical results are reported in Table 3. TABLE 3. 0 Note: N = number of observations. C , (P,,)is the call (put) option's market price, cjt is the time value in the call (put) option's market price. T/,, (U,,) is the model's value for the call (put) option. We thus calculated the average profit for the "all calls" and "all puts" categories as well as subcategories thereof.

0 Note: N = number of observations. C , (P,,)is the call (put) option's market price, cjt is the time value in the call (put) option's market price. T/,, (U,,) is the model's value for the call (put) option. We thus calculated the average profit for the "all calls" and "all puts" categories as well as subcategories thereof. The choice of these subcategories was dictated by the desire to demonstrate the model's performance for options with positive time value (cj, > 0 and pjt > 0), zero model value (V,, = U,, = O), and market prices exceeding an arbitrary lower bound (Cj, r 1/16, Pi, 2 1/16).

The empirical results display statistically significant power in explaining the time series cross-section prices of Treasury bond futures contracts and options on these futures contracts. Further, the model appears to have some power to detect arbitrage opportunities, but only for low-transaction-cost agents able to trade at market prices and borrowAend risklessly; alternatively, these results can be interpreted as yielding asset values closer to the arbitrage-free values of these instruments. The model's ability to price Treasury bond futures contracts and their options successfully indicates its more general property as a mechanism for generating hedge ratios for arbitrary interest-rate-contingent claims.

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A New Method for Valuing Treasury Bond Futures Options by Ehud I. Ronn


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