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Cheapest to Deliver - CTD

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Definition of 'Cheapest to Deliver - CTD'

In a futures contract, the cheapest security that can be delivered to the long position to satisfy the contract specifications. The cheapest to deliver security is relevant only for contracts which provide that a variety of slightly different securities may 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.
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Investopedia explains 'Cheapest to Deliver - CTD'

Determining the cheapest to deliver security is important for the short position, because there is often a disparity between the market price of a security and the conversion factor used to determine the value of the security being delivered. This makes it advantageous for the seller to pick a specific security to deliver over another. Since it is assumed that the short position will provide the cheapest to deliver security, the market pricing of futures contracts is generally based off of the cheapest to delivery security.

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