What is Cheapest To Deliver?
1873 Views · Updated December 5, 2024
The term cheapest to deliver (CTD) refers to the cheapest security delivered in a futures contract to a long position to satisfy the contract specifications. It is relevant only for contracts that allow a variety of slightly different securities to be delivered.This is common in Treasury bond futures contracts, which typically specify that any treasury bond can be delivered so long as it is within a certain maturity range and has a certain coupon rate. The coupon rate is the rate of interest a bond issuer pays for the entire term of the security.
Definition
The Cheapest to Deliver (CTD) bond refers to the least expensive security that can be delivered to fulfill the specifications of a futures contract, applicable only to contracts that allow the delivery of various slightly different securities.
Origin
The concept of the Cheapest to Deliver bond originated in the futures market, particularly in treasury futures contracts. As the futures market evolved, traders needed a mechanism to determine which bond to deliver upon contract expiration, leading to the development of the CTD concept.
Categories and Features
The CTD bond is primarily used in treasury futures contracts, which typically allow the delivery of various bonds that meet specific maturity ranges and coupon rates. The feature of CTD is its cost-effectiveness, as it involves selecting the bond with the lowest delivery cost to maximize profit.
Case Studies
A typical case is the U.S. Treasury futures market, where traders calculate the delivery costs of different treasuries to determine the CTD bond. Another example is the German Bund futures market, where investors similarly analyze the delivery costs of different bonds to select the CTD.
Common Issues
Common issues investors face when applying the CTD concept include accurately calculating delivery costs and understanding how market conditions affect CTD selection. A misconception might be that the CTD is always fixed, whereas it actually changes with market interest rates and price fluctuations.
Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation and endorsement of any specific investment or investment strategy.