The Valuation of T-Bond Futures with the Quality Option

• Main Authors: Kuo-Hsien Wu, 吳國賢
• Other Authors: Hsien-Hsin Liao, Ren-Raw Chen
• Format: Others
• Language: en_US
• Published: 1996
• Online Access: http://ndltd.ncl.edu.tw/handle/78893304888179312154

碩士 === 國立臺灣大學 === 財務金融學系 === 84 === This paper investigates the U.S. Bond futures with the quality option under the Vasicek (1977) model and the Chen (1995) model. There has been a rich body of literature discussing the valuation of quality option embedded in T-Bond futures. Carr (1988) prices the bond futures when the short has a quality option by assuming an equilibrium framework where all bonds prices are generated according to a single factor model. We extend Carr''s model of valuing the bond futures. In his model, Carr did not provide us with the derivation of the futures pricing formula under the normal model. And he does not provide a closed form solution for the bond futures price under the Brennan-Schwartz (1978) two factor model. We discuss it in more details in this paper. In this paper we will show the derivation of Carr''s formula under the one factor Vasicek (1977) model. And the two factor Vasicek model developed by Chen (1995) will be used to derive a closed form solution for the bond futures price with quality option. Finally, the two pricing formulas will be examined empirically. We find that the effectiveness of the pricing formula under the one factor model is better than that under the two factor model.