The Early Exercise of Options on Treasury Bond Futures

Abstract

This paper presents a test of the theory of rational option exercise. Exercise data from the market for options on Treasury bond futures are used to test the model of rational early exercise developed by Barone-Adesi and Whaley (1987) (BAW). The results show that the BAW model underestimates the futures price that will trigger exercise for calls and overestimates this price for puts. The exercise bias is observed to change across option maturities and the direction of the bias is consistent with the direction of the model-pricing bias observed by Whaley (1986).