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I am looking at some empirical methods to model the Treasury Futures wild card. I was looking through some sell side reports and found this statement.

"Wildcard fair BNOC is the net basis under which the wildcard is fairly priced assuming 1bp/2hr from 3-5pm each day"

I'm not exactly sure what it means but is it using Black Scholes to price an option during the delivery period with the following parameters using vol assumption?

Strike = Futures price

Spot = Current bond price

Vol = 1bp/2hr annualized

Risk Free Rate = 1.7%

Days = 30 days or or 0.083 years

Premium = Fair value of wild card?

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Read the latest research by Munier Salem and the rates group at JPMorgan, they just published a piece of research that uses the Option Adjusted Implied Repo Rate. A buy-side guy posted it to page 7 of this document https://docs.google.com/document/d/1IXuJ30WK7R9GyH6RUd6dockTKqu_rbpux3A0ldcAIjc/edit#61;sharing . I can only assume this publication is why you're researching it in the first place...but this metric should work

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  • $\begingroup$ Thanks, I will take a look. Very helpful $\endgroup$ – VanillaCall Dec 10 '19 at 2:51
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@decaybeta - "empirical methods" would mean looking at historical moves in the cash market during the relevant time periods to come up with a fair value (then presumably adding some risk premium) - not pricing via Black Scholes.

Perhaps the NBER paper, "Valuation and Optimal Exercise of the Wild Card Option in the Treasury Bond Futures Market" by Kane and Marcus, 1985, would be of use.

@byouness - there's no link posted.

EDIT: Down-voting replies that provide papers that answer your question is probably not a good way to encourage people to answer your questions.

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This (the wildcard option) is discussed in the book, "The Treasury Bond Basis", on pages 71-73.

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  • $\begingroup$ I have the book and it simply discusses the break-even move in the tail not valuing the option $\endgroup$ – decaybeta Dec 5 '19 at 3:36

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