Abstract
An arbitrage-free stochastic term structure model is used here to determine the equilibrium Treasury bond futures price in terms of the option to deliver one of many eligible bonds as well as the appropriate quantity of Treasury bond futures required to hedge the bond identified initially as cheapest to deliver. If interest rates are close to 6%, the rate used to determine Treasury bond futures conversion factors, the proper hedging quantity can differ significantly from a more standard duration-based quantity that ignores the option to switch delivery to a more optimal bond. If interest rates are significantly different from 6%, the option to switch will have little if any value, and hedging quantities that ignore the option to switch will be much more accurate.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
