Group for Research in Decision Analysis

G-2006-77

Pricing the CBOT T-Bonds Futures

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The aim of this paper is to investigate the pricing of the Chicago Board of Trade Treasury-Bond futures. The difficulty to price it arises from its multiple inter-dependent embedded delivery options, which can be exercised at various times and dates during the delivery month. We consider a general Markov diffusion process model for stochastic interest rates and propose a pricing algorithm that can handle all the delivery rules embedded in the CBOT T-bond futures. Our procedure combines dynamic programming, finite-elements approximation, and fixed-point evaluation. Numerical illustrations are provided under the one-factor Vasicek (1977) and Cox-Ingesoll-Ross (1985) models, and under the time in-homogeneous Hull-White (1990) model.

, 40 pages

This cahier was revised in May 2009