Hi,I have browsed the net for a while but couldn’t succeed in finding an exact way to calculate the price of option with daily settlement, ie, options that are marked to market daily. If you don’t know this product, it is an american option where the buyer pay the premium when the option is exercised (or at maturity) instead the trade date. In other words, until the exercise date the options positions are marked-to –market daily giving rise to positive or negative variation margin flows. If the option is exercised by the buyer, the buyer must pay the premium.These kinds of options are traded at EUREX with the underlying is the Ten year German Government Bond (bund) futures. I would like to know if someone has experience with this kind of option? If so, how do you price it?Thanks in advanceAlan

Are you asking how to price an option on a bond future? Well, first you have to understand the underlying bond future. If you don't mind material on US Treasury bond futures, get Galen Burghardt's lecture notes at gsbwww.uchicago.edu/fac/galen.burghardt/ teaching/339Spring99/Lecture5/uofcsec02b.pdfThese are rather terse class notes, but very good. You might also find futures options stuff there too. I assume the bund futures option has a delivery option (the short can deliver any bond from the delivery set if exercised against). The delivery option is not trivial to model, so a quick way to get close is to assume the cheapest-to-deliver bond is the only deliverable and use the Black futures option model.

Basically because you dont have to pay the premium when you buy the option or you dont receive it when you sell it, the value of the option is the forward value ie not the discounted pv. If you think about it, the option price is the discounted pv of the terminal value which is what the margined option shoudl be worth.

yup basically as daveangel just described, for more details see also:Lieu 1990 "Option Pricing with Futures-Style Margining" Journal of Futures Markets, 10

Collector it was exactly what I was looking for, thank you so much for your valuable help.Daveangel and DavidJN I appreciated your willingness to help me, thank youAll the bestAlan

Hi, I could not access the website for the article any more. Do you mind to send a new link or the article to me instead? Many thanks. shaobing33@yahoo.comBest Regards

Can someone point me to a pdf somewhere on the web of Lieu 1990 "Option Pricing with Futures-Style Margining" Journal of Futures Markets, 10 Thanks,Tony

QuoteOriginally posted by: alandgd<br ie, options that are marked to market daily. If you don?t know this product, it is an american option where the buyer pay the premium when the option is exercised (or at maturity) instead the trade date. In other words, until the exercise date the options positions are marked-to ?market daily giving rise to positive or negative variation margin flows. If the option is exercised by the buyer, the buyer must pay the premium.These kinds of options are traded at EUREX with the underlying is the Ten year German Government Bond (bund) futures. I'm not sure about your description. The options on EUREX (on German bonds) have a daily futures-style settlement method. There is no "payment of premium when the option is exercised". The daily margin is the only payment. See http://www.eurexchange.com/exchange-en/ ... /15566/.To my understanding the CME options (on US treasuries) have an up-front premium payment (and no daily margining). The material on the US Treasury options would not help on the daily margin side of your question.