Pricing Bond Future Option

A bond future option is an option contract that gives the holder the right but not the obligation to buy or sell a bond future at a predetermined price. The writer/seller receives a premium from the buyer for undertaking this obligation. Options are leveraged instruments that allow the owner to control a large amount of the underlying asset with a smaller amount of money. Bond future options offer significant advantages for reducing costs, enhancing returns and managing risk. They could be European style or American style. This presentation provides an overview of bond future option product and valuation.