Treasury Bond Futures Pricing Based On Interest Rate Term Structure Model

Treasury bond futures is one of the most important varieties in interest rate futures, which produced in the United States in 1970s. It uses government bond as the underlying asset in a futures trading. China has the similar market environment with America when implementing the bond futures. As an indispensable financial derivatives to hedge interest rate risk, treasury bond futures will play a big role in the coming Chinese financial markets undoubtedly. This paper will deduce the Chinese treasury bond futures pricing formula based on the contract structure and trading rules. And an empirical study will be carried out afterwards.Interest rate term structure models also come from the West in 1970s. Un-der the liberalization of interest rates, it was widely accepted by academics to describe interest rate behaviour with the help of random variables. From Merton Model, Vasicek Model to Hull-White, HoLee Model, and then to HJM Model, BGM Model, IR term structure model has become an essential tool for pricing financial derivatives. By comparison, in China, the market benchmark interest rates are mostly set by government at first. As a result, the IR model is not initially as suitable and useful in China as in other countries. However, recently with the acceleration of interest rates liberalization in mainland, a more complete market makes the term structure model much more helpful in China.This paper presents an attempt at describing market interest rate with the help of HoLee Model. The emphasis of the paper is on treasury bond futures pricing, which is based on Cost of Carry theory. In particular, given the market quote of futures price, the paper analyses the implied volatility of market interest rates and the △ of bond futures. All this information provide a reference for risk hedging on investment portfolio.