The Embedded Option Pricing of Treasury Bond Futures under GED-IO Model

This study proposes the concept of “integrated options” to systematically capture embedded optionality in Treasury bond futures in China. Building on the cost-of-carry (CoC) model, we model valuation deviations of deliverable bonds by independent generalized error distributions (GEDs). Using Monte Carlo simulations to generate price trajectories, we quantify integrated option values and derive futures prices via the Newton-Raphson method. Empirical analysis across 23 contracts reveals that the GED-integrated option (GED-IO) model significantly outperforms the CoC benchmark in normal markets. It reduces mean absolute error (MAE) by 22.98% and mean absolute percentage error (MAPE) by 0.09% for 70% of contracts (16/23), demonstrating enhanced accuracy, convergence, and stability. However, structural failures occur in 7 contracts during intensive monetary easing cycles (2021–2022 and post-2024) due to accelerated policy expectation iteration. This highlights adaptation limitations to policy-risk transmission. Future research should integrate adaptive policy expectations and sentiment-price transmission. Our work provides a methodological foundation for pricing derivatives in China’s policy-sensitive markets while framing critical refinements.