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What is Bond Option Pricing: Clean vs. Dirty Volatility about?

This document discusses whether bond option pricing should use clean or dirty bond prices. It argues that clean prices should be used to calculate price volatility, as dirty prices contain accrued interest which does not reflect true price uncertainty. However, for strike and settlement prices, dirty prices should be used since they represent the actual traded market value. Failing to use the appropriate price basis can lead to bond option valuations differing by up to 30%.

Author

Saurabh Kumar

Language

EN