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A Discrete Time Model for Pricing Treasury Bills, Forward, and Futures Contracts*

Published online by Cambridge University Press:  29 August 2014

I.G. Morgan  and
E.H. Neave
I.G. Morgan*
Affiliation:
Queen's University School of Business, Kingston, Ontario K7L 3N6
E.H. Neave*
Affiliation:
Queen's University School of Business, Kingston, Ontario K7L 3N6
*
Queen's University School of Business, Kingston, Ontario K7K 3N6.
Queen's University School of Business, Kingston, Ontario K7K 3N6.
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Abstract

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This paper develops a discrete time model for valuing treasury bills and either forward or futures contracts written against them. It provides formulae for bill prices, forward prices, futures prices, and their conditional variances and risk premiums. The interest rate process is described by a multiplicative binomial random walk whose features conform to some principal characteristics of observed processes. Initial forward rates are constrained to match initially observed term structure data.

Type
Articles
Information
ASTIN Bulletin: The Journal of the IAA , Volume 23 , Issue 1 , May 1993 , pp. 3 - 22
Copyright
Copyright © International Actuarial Association 1993

Footnotes

*

Earlier versions of this paper were presented to the Inaugural Meetings of the Northern Finance Association, Ottawa, Canada, September 23-24, 1989, and to the First AFIR International Colloquium of the International Actuarial Association, Paris, April 23-27, 1990. We thank the editor and referees for constructive suggestions.

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