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

By Ehud I. Ronn

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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).

Summary This analysis proposed and implemented a trinomial no-arbitrage model of state-dependent shifts in the term structure of interest rates. This model was then applied to the valuation of several important interest-dependent instruments: Treasury bond futures contracts and call and put options on these futures. 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.

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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