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Quality options and hedging in Japanese Government Bond Futures markets

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Abstract

Quality options for Japanese Government Bond Futures contracts are analysed using a discrete trinomial tree approach based upon a two-factor Heath, Jarrow, and Morton (1990b) model. The impacts of the quality option on hedging effectiveness are investigated. In general, the pure quality option is found to be relatively small and, while the quality option does not have a dramatic impact upon hedging, accounting for the quality option can improve the performance of optimal hedging strategies.

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Authors and Affiliations

  1. National Taiwan Institute of Technology, Taiwan

    Shang-Wu Yu

  2. University of Birmingham, England

    Michael Theobald & John Cadle

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  1. Shang-Wu Yu
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  2. Michael Theobald
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  3. John Cadle
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Yu, SW., Theobald, M. & Cadle, J. Quality options and hedging in Japanese Government Bond Futures markets. Financial Engineering and the Japanese Markets 3, 171–193 (1996). https://doi.org/10.1007/BF00868085

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