Ultra Treasury Bond Futures

Abstract

In this article, we determine the quality option value of Ultra Treasury bond futures contracts, which allow deliverable bonds between 25 and 30 years to maturity, and compare them with the new regular Treasury bond futures, which allow deliverable bonds between 15 and 25 years to maturity. We use the arbitrage-free Ho-Lee model for the valuation. Using weekly data from March 25, 2011, until April 16, 2021, after the Ultra futures contract was introduced, we discover that (1) that quality option value is higher for the Ultra futures than the new regular futures, (2) the Ho-Lee model consistently underprices the market, and (3) the “dry spell” period predicted by Ben-Abdallah and Breton in 2017 is only partially supported.