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Quantitative Finance · Glossary

What is Quality option and wildcard option?

Also known as: quality option · wildcard option

Definition 6.9 Markets II: Rates, FX and Credit · Chapter 6 — Bond Futures

The short’s right to choose which note to deliver is the quality option. The wildcard option is its right, during the delivery period, to decide whether to deliver after the futures settlement price has been fixed for the day, while the notes still trade; after the last trading day the invoice price is fixed and the short may deliver on any of the remaining days. The right to choose the day within the delivery month is the timing option.

The delivery month of the ten-year note future. The short chooses the note (quality option), the day (timing option), and, every day until trading stops, whether to deliver after the day’s settlement price is known (wildcard option). Trading stops on the seventh business day before the last business day of the month; the invoice price is then fixed, and delivery may take place on any remaining business day up to the last.
Figure 6.2. The delivery month of the ten-year note future. The short chooses the note (quality option), the day (timing option), and, every day until trading stops, whether to deliver after the day’s settlement price is known (wildcard option). Trading stops on the seventh business day before the last business day of the month; the invoice price is then fixed, and delivery may take place on any remaining business day up to the last.
At delivery, each note’s clean price divided by its factor, minus the lowest, as all yields move together. The note on zero is the CTD. From today’s yields the shortest note stays cheapest until yields have risen 147 basis points, to about 5.5%; beyond that the longest note takes over. Notes and yields are illustrative. Data: the chapter’s tutorial.
Figure 6.3. At delivery, each note’s clean price divided by its factor, minus the lowest, as all yields move together. The note on zero is the CTD. From today’s yields the shortest note stays cheapest until yields have risen 147 basis points, to about 5.5%; beyond that the longest note takes over. Notes and yields are illustrative. Data: the chapter’s tutorial.
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