Saturday 9 April 2022

New working paper: Options on overnight futures

We are pleased to announce a new working paper titled

Options on overnight futures

is available in our muRisQ Advisory Model Development series of research papers. The paper is available on SSRN preprint repository at http://ssrn.com/abstract=4068731.

Abstract

With the transitions to overnight benchmarks as the main benchmarks in some currencies, futures based on overnight rates are becoming more common. The most traded futures on overnight rates settle agains compounded rates. The pricing of those futures requires some convexity adjustments with an Asian flavour due to the composition. Together with the greater liquidity of those futures came the market for options on futures. The options are traded with the usual futures daily margin mechanisms and can be standard options or mid-curve options; the options themselves are European or American. The pricing of those options, require different adjustments for the margin and composition features. In this note we propose the pricing of those options in the Gaussian HJM framework.