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On the bond future contract quality option
Susana Reichardt |
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This paper provides a method for pricing the quality option embedded in some future
contracts. Firstly, we obtain the quality option price in perfect markets. Next, we incorporate
frictions and we generate upper and lower bounds for the option value. The study presents the
following contributions with respect to previous literature. 1. The analysis does not depend on
any dynamic assumption concerning the TSIR behaviour. 2. We value the quality option with the
information contained in the future contract and in the calls and puts on the future contract. 3. We
use real market perfectly synchronized prices. 4. We incorporate transaction costs. The empirical
tests are implemented with the Bund Future traded in EUREX.
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