Cheapest to Deliver

Cheapest to Deliver (CTD) is one of the most important term in bond futures trading as it allows one to identify which bond will be the cheapest to deliver against a futures contract. It is especially significant for short holders because bonds are different in terms of price and conversion factors.

Why Does CTD Matter?

For the purpose of unwinding a bond futures contract, sellers have the option to choose from a number of deliverable bonds. However, each bond has a specific conversion factor, which is used to account for variations in coupon rate and maturity date. This will probably generate a price discrepancy between the market price of a bond and its adjusted futures price. To reduce costs, traders choose the cheapest-to-deliver bond.

How is CTD Calculated?

The formula to identify the cheapest-to-deliver bond is:

CTD = Current Bond Price – (Settlement Price × Conversion Factor)

With the above calculation, traders can know which bond will bring them maximum profit or the lowest cost when delivering their future contract.

Key Takeaways

• CTD is critical in future short bond positions.
• The conversion factor is the one that causes price differences among bonds.
• Choosing the cheapest-cost bond to deliver assists traders in gaining maximum profit.

Conclusion

Choosing the cheapest to deliver bond is highly significant for future traders who want to effectively hedge positions and achieve maximum returns. Choosing the cheapest to deliver bond helps traders gain an edge and improve overall profitability in the market.