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FIGURE 43 Three scenarios for the value of carry (expanded case) between intrinsic value and the accrued value of carry In other words, if exercising a delivery option means that the basis trade will cease to exist, then any carry value remaining in the basis trade is forfeited Figure 44 presents the relationship between the value of carry and the value of the delivery options as expiration approaches As long as S, R, Yc, and are virtually unchanged over the life of the basis trade, then the value of carry will decline in a relatively linear fashion, as depicted By contrast, the time decay pattern of Od (as with options generally) is more curvilinear, as discussed in 5 Of all the options said to be embedded in Treasury futures, the three most commonly cited are the quality option, the wildcard option, and the timing or cost-of-carry option.



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Regarding the quality option and the 10-year Treasury futures contract, any Treasury maturing in not less than 61/2 years or more than 10 years from the date of delivery may be delivered into a long contract Although only one deliverable bond is generally CTD at any one time, the CTD may change several times between a given trade date and delivery date Unique profit opportunities are associated with each change in CTD, and investors are free to switch into more attractive cash/future combinations over time The transitory behavior of the CTD has value to the holder of a short futures position, and the quality option quantifies this value As to the wildcard option, on each day between the first business day of the delivery month and the seventh business day before the end of the delivery month, the holder of a short bond futures position has until 9 PM.

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(1995) provide an excellent introduction to these methods For a rudimentary introduction to importance sampling and resampling, see Smith and Gelfand (1992); to Monte Carlo methods, see MacKay (1998); to Gibbs sampling, see Casella and George (1992); and to the Metropolis Hastings algorithm, see Chib and Greenberg (1995) 521 Rejection Sampling The simplest posterior sampling method is rejection sampling We can apply this technique to sample from ( |D) using its unnormalized form, L( |D) ( ) The density that we wish to sample from is called the target density In rejection sampling, the target density is approximated by an envelope function This probability density function, denoted by g( ), is known and easily sampled Generally, g( ) is chosen to be roughly proportional to L( |D) ( ) Assume that the support of the prior is bounded.

The eigenvalues of F have the same interpretation as the poles of the related system _ transfer function, in that the dynamic system x Fx w is stable if and only if the solutions l of det lI F 0 lie in the left half-plane. Example 7.4 Damping and Resonant Frequency for Underdamped Harmonic Resonator. For the dynamic coef cient matrix 0 F R Cspring m P Cdamping S m 1 Q

Eastern Standard Time (EST) to notify the exchange of an intention to deliver Delivery means that deliverable securities are provided in exchange for a cash payment The investor who is short the futures contract sells the deliverable securities, and the investor who is long the futures contract buys those securities To determine how much ought to be paid for the delivered securities, an invoice price is set at 3 PM EST The invoice price is calculated from the future s settlement price at 3 PM EST on the day that a delivery notice is given The.

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