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The Journal of Fixed Income

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Primary Article

Delivery Options in the Pricing and Hedging of Treasury Bond and Note Futures

Richard J.. Rendleman
The Journal of Fixed Income Fall 2004, 14 (2) 20-31; DOI: https://doi.org/10.3905/jfi.2004.439834
Richard J.. Rendleman Jr
A professor of finance at the Kenan-Flagler Business School of the University of North Carolina at Chapel Hill.
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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.

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The Journal of Fixed Income
Vol. 14, Issue 2
Fall 2004
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Delivery Options in the Pricing and Hedging of Treasury Bond and Note Futures
Richard J.. Rendleman
The Journal of Fixed Income Sep 2004, 14 (2) 20-31; DOI: 10.3905/jfi.2004.439834

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Delivery Options in the Pricing and Hedging of Treasury Bond and Note Futures
Richard J.. Rendleman
The Journal of Fixed Income Sep 2004, 14 (2) 20-31; DOI: 10.3905/jfi.2004.439834
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