I've been working on a Treasury futures DOV model. One difficulty I ran into is how to incorporate notes/bonds that haven't been auctioned but could potentially be delivered. The maturities of these securities can be easily inferred based on recent auction patterns. The coupon rates are quite tricky.. I figured the easiest way is to introduce a range of coupons based on the yield distribution of a reference bond (say on-the-run) as of the issue date. But this method seems to be causing the WIs to have very high delivery probability, which in turn is causing delivery option value to be overvalued. Does anyone have any inputs as to what the best remedy might be?Thanks a lot!

QuoteOriginally posted by: haginile[br]I've been working on a Treasury futures DOV model. Could you give a little bit more details about what the "DOV model" is? Do you have a reference?QuoteOne difficulty I ran into is how to incorporate notes/bonds that haven't been auctioned but could potentially be delivered. The maturities of these securities can be easily inferred based on recent auction patterns. The coupon rates are quite tricky.. I figured the easiest way is to introduce a range of coupons based on the yield distribution of a reference bond (say on-the-run) as of the issue date. But this method seems to be causing the WIs to have very high delivery probability, which in turn is causing delivery option value to be overvalued. Does anyone have any inputs as to what the best remedy might be?Currently the rates are very low with respect to the "strike coupon rate" of the US Treasury futures (6%) (to my knowledge, among the main bond futures there is only the 30Y German one, for which the strike is 4%, for which it is not the case). With rates well below that level, the delivery will favour the short maturity bonds. Usually the new issuance are at the long end of the range (the 10Y is at the end of the 6Y6M-10Y range, the 5Y is at the end of the 4Y2M-5Y3M, etc.) and the impact of the WI is very small (not to say null). Obviously the behaviour would be very different if the rates were very high or the strike coupon was changed (there were changed in for some GBP futures in December).How do you get a very high delivery probability for the WI in the current rate environment? What do you mean with introducing a range of coupons? Do you have two bonds in your basket, one with a low coupon and one with a high coupon?

QuoteCould you give a little bit more details about what the "DOV model"According to Burghardt's book on bond futures, DOV = Delivery Option Value

Thanks for the replies. Yes DOV stands for delivery option value.Here's a hypothetical scenario, let's assume we have one security in the deliverable basket maturing on June 30, 2015. Let's also say that we know in three months' time, a new security will be issued also maturing on June 30, 2015. Of course, we don't know what the coupon rate will be.As of today, we can generate a range of yield scenarios of the old Jun15s (using any interest rate model) as of the issue date (3m later). If yield volatility is high, the range of yields could be quite large. For each yield scenario though, we could then assign a different coupon for the new Jun15s. Now that the coupon rates have been determined, we can continue to generate more yield scenarios for farther dates, and determine the delivery probability of these securities. Is this the right way to think about this?Thanks!