IDEAS home Printed from https://ideas.repec.org/a/wly/jfutmk/v20y2000i3p293-306.html
   My bibliography  Save this article

Pricing Eurodollar futures options using the BDT term structure model: The effect of yield curve smoothing

Author

Listed:
  • Turin G. Bali
  • Ahmet K. Karagozoglu

Abstract

This article focuses on pricing Eurodollar futures options using the single‐factor Black, Derman, and Toy (1990) term structure model with particular emphasis on yield curve smoothing. Of the various approaches, the maximum smoothness forward rate approach developed by Adams and van Deventer (1994), cubic yield spline, and linear interpolation are used to produce finely spaced binomial trees. We compare the pricing accuracy associated with the use of yield curve smoothing techniques within the BDT framework. The findings provide the first supporting evidence that using a forward rate curve with maximum smoothness together with a time‐varying volatility structure improves best the performance of the BDT model. The empirical results are found to be robust across factors affecting the option price such as time‐to‐expiration, moneyness, and trading volume. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:293–306, 2000

Suggested Citation

  • Turin G. Bali & Ahmet K. Karagozoglu, 2000. "Pricing Eurodollar futures options using the BDT term structure model: The effect of yield curve smoothing," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 20(3), pages 293-306, March.
    • Handle: RePEc:wly:jfutmk:v:20:y:2000:i:3:p:293-306
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Les Gulko, 2007. "A test of the beta model on Eurodollar futures options," Quantitative Finance, Taylor & Francis Journals, vol. 7(5), pages 497-505.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:jfutmk:v:20:y:2000:i:3:p:293-306. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.interscience.wiley.com/jpages/0270-7314/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.