What is 'Best To Deliver'

Best to deliver is the security 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—after the futures contract expires—but has the ability to choose between different durations and different yields when determining which exact security to deliver.

This is acceptable because certain futures contracts allow for a slight variation in the product delivered. Treasury bonds can be delivered within certain maturities and certain coupon rates, and are still considered valid for delivery of the contract.

Best to Deliver Example

An investor may have taken a short position in Treasury bond futures, and is required to deliver the bond outlined in the futures contract to the contract buyer when that contract expires. If the term structure of the bonds change it may become more profitable for the investor to deliver a different bond. Term structure is the relationship between interest rates and various bond maturities. The investor has the option to make the switch or continue to deliver the specific bond in the futures contract.

The short position may also consider the cheapest to deliver. This is the bond that is the cheapest security allowable to be delivered by the short position to the futures contract buyer.

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 within a certain tolerance (the quality option), and may also allow the investor to deliver to different locations (the location option).

  1. Cheapest to Deliver - CTD

    Cheapest to deliver (CTD) in a futures contract is the cheapest ...
  2. Contract Month

    The contract month is the month in which a futures contract expires.
  3. Physical Delivery

    Physical delivery is a term in an options or futures contract ...
  4. Bond Option

    A bond option is an option contract in which the underlying asset ...
  5. Futures Contract

    An agreement to buy or sell the underlying commodity or asset ...
  6. Delivery Option

    A delivery option permits the seller of a futures contract to ...
Related Articles
  1. Investing

    How To Short The U.S. Bond Market

    The U.S. bond market has enjoyed a strong bull run over the past few years as the Federal Reserve has lowered interest rates to historic low levels.
  2. Trading

    Beginner's Guide To Trading Futures

    An in-depth look into what futures are, and how you can build a solid base to begin trading them.
  3. Investing

    Find the Right Bond at the Right Time

    Learn about the types of bonds you should consider investing in, when you should be buying them and how to compare yields against their time to maturity.
  4. Trading

    A Quick Guide To Debt Options

    Options on debt instruments provide an effective way for investors to manage interest rate exposure and benefit from price volatility, learn more today.
  5. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  6. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
Trading Center