Abstract
The purpose of this paper is to investigate the performance of three different models in the pricing of call options on ninety-day bank bill futures traded on the Sydney Futures Exchange between 1993 and 2000. The three models analysed are embedded into the Heath, Jarrow, and Morton framework namely; the one, two, and three factor models. Principal Components Analysis was applied in order to provide the forward rate volatility functions necessary to implement several popular multi-factor versions of the Heath, Jarrow, and Morton model. Results showed that the three-factor model consistently outperforms the one and two-factor models. Also the pricing errors are positively correlated with the time to maturity of the option and that no real relationship existed between the errors of one and two-factor models and the date and the moneyness of the options. Although three-factor models exhibited lower errors as time progressed.