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quentin
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Posts: 26
Joined: December 20th, 2005, 8:38 am

IR futures options

June 27th, 2008, 11:16 am

Hello,is there any recommended model to price American-style options on Interest Rate Futures?Thanks for the help,Quentin
 
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Martinghoul
Posts: 3256
Joined: July 18th, 2006, 5:49 am

IR futures options

June 27th, 2008, 11:27 am

Have you seen many American-style options on Interest Rate Futures in practice? Anyways, SABR is what I like...
Last edited by Martinghoul on June 26th, 2008, 10:00 pm, edited 1 time in total.
 
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daveangel
Posts: 17031
Joined: October 20th, 2003, 4:05 pm

IR futures options

June 27th, 2008, 12:08 pm

Eurodollar options are American style ... I think practically Black is used
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Gmike2000
Posts: 801
Joined: September 25th, 2003, 9:49 pm

IR futures options

June 27th, 2008, 6:32 pm

if they are futures then they are exchange traded, no? if they are exchanged traded, you have daily margining and you get interest on that. you can then treat them like european options, no? yes! yah yah yah! zis must be ze truth.
 
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unkpath
Posts: 289
Joined: January 13th, 2004, 8:44 pm

IR futures options

June 28th, 2008, 1:01 am

i think he is interested in futures options and not just futures. gmike2000, you need to make the distinction between an option on an underlying and the underlying itself. please refer to any textbook on market finance if you are confusedabout this fundamental point. now it is true that there exist futures options that are themselves margined and it is the case then that there is no extra american premium and that the option can be valued as a european. there is some old papers on this by some CME dudes, when they introduced this kind of options on the merc.however, this is not necessarily the case, the details for which need to be checked with the exchange. what one should use then is not a closed question. you could use black76 with some adjustments, but you could also resort to a more sophisticated model, depends on what you want to do, who you want to beat, etc... QuoteOriginally posted by: Gmike2000if they are futures then they are exchange traded, no? if they are exchanged traded, you have daily margining and you get interest on that. you can then treat them like european options, no? yes! yah yah yah! zis must be ze truth.
 
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Martinghoul
Posts: 3256
Joined: July 18th, 2006, 5:49 am

IR futures options

June 28th, 2008, 9:13 am

So they are, Dave, so they are... I was thinking mostly about LIFFE ones, which are American in name, but European in spirit, as gmike pointed out. I use SABR for those, Black for eurodollars, but I try to stay away from the latter...
 
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quentin
Topic Author
Posts: 26
Joined: December 20th, 2005, 8:38 am

IR futures options

March 27th, 2009, 12:59 pm

Thanks for the advice, Black and SABR are indeed the most currently used. Perhaps will we also try H&W.
Last edited by quentin on March 26th, 2009, 11:00 pm, edited 1 time in total.
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