ABSTRACT
This chapter explains the quantitative parameters of a model of the Treasury futures contracts where the model is based on the Nelson-Siegel model of the Treasury yield curve, and using this model to test the hypothesis that the Nelson-Siegel characterization of the yield curve identifies the true, unobservable default-free discount function. Fixed-income practitioners have made use for more than two decades of factor models of the yield curve both to manage curve risk and define investment policy. While a seven-factor model of the curve might be made analytically tractable, it would be hard to describe it as parsimonious. The model of cheapest to deliver also exhibits yield-curve dependencies. One component is called carry, and arises from the difference between the current yield on the cheapest Treasury to deliver, on the one hand, and the yield on cash balances to be available on the delivery data of the contract.
