Bund options implied

There was zero response from the Options forum on this. I'll try here.

Which is the standard model to determine implieds on Bund options?

Being US-style exercise, Black or Black-Scholes are inappropriate.

All things considered, the Hull and White model, utilising trinomial trees, seems the favourite but also appears somewhat complex to my non-mathematical mind.

Any suggestions?

Thank you.

Grant

 

since when doesn't black scholes "work" for us style options?

 

See hoadley.net (Cox-Ross-Rubinstein)

 

Black-scholes variant models only work for vanilla european-exercise options

 

Trade4success,

“since when doesn't black scholes "work" for us style options?”

The price of the (underlying) bond must equal its face value at maturity, referred to as “pull-to-par”. This removes the uncertainty (variability or volatility) of its price in the future/at maturity (I presume this doesn’t apply in the intervening period in regard to a possible change in the term structure). Contrast this with stocks or indexes – the greater the time ahead, the greater the uncertainty.

Interest rates (the key component of bond valuation) are generally mean reverting – if high, will tend towards lower, and vice versa. Stock prices are not mean-reverting

The early exercise possibility means the bond price must be accounted for at all times, as per binomial model.

I stand to be corrected.

This is pretty well covered in Hull’s, Options, Futures and Other Derivative Securities (2nd edition).

Quite1,

Thank you for the reference. I’ll check it out.

Grant.