Working Paper: NBER ID: w1614
Authors: Alex Kane; Alan J. Marcus
Abstract: The Chicago Board of Trade Treasury Bond Futures Contract allows the short position several delivery options as to when and with which bond the contract will be settled. The timing option allows the short position to choose any business day in the delivery month to make delivery. In addition, the contract settlement price is locked in at 2:00 p.m. when the futures market closes, despite the facts that the short position need not declare an intent to settle the contract until 8:00 p.m. and that trading in Treasury bonds car, occur all day in dealer markets. If bond prices change significantly between 2:00 and 8:00 p.m., the short has the option of settling the contract at a favorable 2:00 p.m. price. This phenomenon, which recurs on every trading day of the delivery month, creates a sequence of 6-hour put options for the short position which has been dubbed the "wild card option." This paper presents avaluation model for the wild card option and computes estimates of the value of that option, as well as rules for its optimal exercise.
Keywords: Treasury bond futures; Wild card option; Valuation; Optimal exercise
JEL Codes: G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wild card option (C70) | put option for short position (G13) |
| put option for short position (G13) | futures price (G13) |
| bond prices (G12) | decision to deliver or mark to market (G19) |
| wild card option (C70) | optimal stopping problem for delivery decision (C69) |
| optimal exercise strategy (C61) | profit maximization (L21) |
| futures price (G13) | value of option (D46) |