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Whilst I have managed to find plenty of material on pricing of Interest Rate Options (i.e. Caps, Floors, Swaptions, spread-options, etc.), I haven't really managed to find any solid papers on the topic of "pricing models for options on Fixed Income": i.e. Treasury & Bund Options and / or options embedded in callable & putable corporate or government bonds.

I've googled and haven't really been able to find any good PDFs on SSRN or other resource websites or journals (I know there's the book by Vladimir Piterbarg, specifically volume III, that might cover some aspects of the Bond option pricing theory, but at this point in time, I am just looking for freely available papers that have been accepted as the "industry standard" on the topic).

Any tips would be greatly appreciated.

Ps: I am not looking for lecture notes on how to price bonds using the Vasicek model or the Hull-White model :) My assumption is that the industry has moved on and the standard nowadays is different (I just haven't managed to find any such papers).

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    $\begingroup$ I don't know of anything close to an industry standard. The shop where we both used to work has a nice inernal paper on bond options, with a focus on high-yield bonds. It uses a 2-dimensional tree, one dimension for rates, another for credit. It also discusses a lot the various ways of predicting the forward price of the undelrying bond, none of which are perfect. $\endgroup$
    – Dimitri Vulis
    Nov 28, 2020 at 14:10
  • $\begingroup$ @DimitriVulis: thank you so much! $\endgroup$
    – Jan Stuller
    Nov 28, 2020 at 14:15
  • $\begingroup$ Would you guys be able to pass on a reference? $\endgroup$
    – Kermittfrog
    Nov 28, 2020 at 14:55
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    $\begingroup$ sorry!! I'd love to but, but I don't think we're allowed. I passed on to Jan the name of the guy who wrote the paper and might help him. A lot more people tried to make markets in bond options in the 1990s - until 2005 I'd say. There used to be a lot more activity than now, especially in option of Brady bonds (emerging markets bonds partially guaranteed by U.S. government) and high-yield bonds. The strike was almost always clean price, but I've seen yield and even dirty price. This market has almost disappeared. $\endgroup$
    – Dimitri Vulis
    Nov 28, 2020 at 20:02
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    $\begingroup$ The LMM is basically a standardized Heath-Jarrow-Morton approach, and so a HJM variant would be used for the treasury based market too. Of course, when rates can go negative as particularly in Japan, you have to watch how you construct the model. $\endgroup$
    – Brian B
    Dec 1, 2020 at 16:09

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In the area that I'm familiar with, options on MBS TBAs, as commented by Dimitri, there don't appear to be any standard models. Among other reasons, this is probably due to a lack of liquidity in the sector (there are very few market makers) and the fact that any such mortgage option model will show some dependence on the prepayment model/OAS pricing framework, which themselves lack standardization. For a flavor of some of the modeling considerations involved in pricing mortgage options, take a look at Mortgage Options: A Primer.

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