DEFINITION of 'Best To Deliver'

The security that is delivered by the short position holder in a futures contract, and which is considered the most optimum for the position holder in terms of profitability. Best to deliver is associated with securities that have yields, such as bonds, and is a component of a quality option or switching option. Futures contracts specify which types of bonds, securities, or other goods are considered acceptable to deliver.

BREAKING DOWN 'Best To Deliver'

Investors who take the short position in a futures contact may be able to realize more profit by changing the bond that is delivered. The investor will seek to change the quality of the bond, while still delivering an acceptable security. The security that is considered the best to deliver may change over time, as different yields and durations change the value of the security.

As the yield on a security changes, so too will the value of the security that is set to be delivered as part of a futures contract. An investor that has taken the short position on a futures contract is required to deliver a security at a specified period of time, but has the ability to choose between different durations and different yields when determining which exact security to deliver.

For example, an investor may have taken a short position in Treasury bonds, and will be required to deliver the bond outlined in the futures contract. If the term structure of the bonds change it may become more profitable for the investor to deliver a different bond. The investor has the option to make the switch or continue to deliver the specific bond in the futures contract.

Best to deliver may also be used in the delivery of physical goods, such as commodities. A futures contract involving corn may allow the short position holder to deliver different grades of corn (the quality option), and may also allow the investor to deliver to different locations (the location option).

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