Market-Based and Model-Based Delta for Treasury Futures Options

Summary

The document asks how to distinguish a market-price-based delta from a model-price-based delta for options on Treasury futures. It describes delta as the option price's sensitivity to the underlying futures price and proposes estimating that sensitivity by shifting an interest-rate curve, repricing the future, repricing the option, and taking the ratio of the resulting price changes. This raises a practical question: since option repricing appears to require a model, what makes a delta market-based?

The text provides no answer or worked calculation. It does not define a particular exchange convention, explain how market option quotes can be used to estimate delta, or specify how curve shifts map to futures-price changes. Consequently, it frames a useful distinction in rates-option risk but leaves unresolved whether the intended comparison concerns market quotes, an implied-volatility surface, or model sensitivities calibrated to observed prices. The only concrete context is Treasury futures options; no data, evidence, or conclusions are supplied.

Key ideas

• Delta measures the sensitivity of an option's price to a change in its underlying futures price.
• A curve shift can affect both the futures contract price and the option price.
• The proposed finite-difference approach requires a method for determining the option price after the shift.
• The document asks how market-based delta differs from model-based delta but does not answer the question.
• No pricing convention, calculation example, or empirical evidence is provided.

Tags

# 'Market price' based Delta vs 'Model Price' based Delta for Bond Future Options?


# 'Market price' based Delta vs 'Model Price' based Delta for Bond Future Options?












My understanding of Delta is the change in the Option's price relative to the change in the underlying asset's price.

In the case of Treasury Future Options (ie those on CME), one intuitive way to do it is to shift interest rate curve (whatever curve the underlying asset depends on) by a certain amount, and then compute the prices of the underlying future contract, as well as the prices of the option itself, and find the ratio of the differences of those 2 types of prices. This will give me the 'Delta' of this option.

The trick of course is computing the price of the option in the above. And this is where option price modeling comes in.

But why would there be a 'market price' based delta? Whatever price that we need to find in the above methodology must be computed using a model, no?

How would one find a 'market price' based Delta ?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.