The Pricing of the Option Implicitly Granted by the Italian Treasury to the Specialists in the Reserved Auction Reopening

The Italian Treasury selects a group of Specialists within the Government securities primary market participants. They benefit from a set of obligations and privileges. Academic literature paid scant attention to the privilege of participation in reserved auction reopenings, i.e. the right to buy predetermined additional quantities of Government securities at the auction price. This paper attempts to price this privilege as a call option in the framework of the Cox - Ingersoll - Ross model. No matter the one-day life, it has a value significantly different from zero. Moreover, it helps to explain part of the mispricing between the primary and secondary market.