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

By Ehud I. Ronn

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Extra info for A New Method for Valuing Treasury Bond Futures Options

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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.

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 demonstrate convincingly that the model values can, at least to market makers trading with close to zero transaction costs, generate arbitrage profits and therefore represent more accurately the fair value of these options.

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. 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).

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