What is 'Cheapest to Deliver - CTD'

Cheapest to deliver (CTD) in a futures contract is the cheapest security that can be delivered to the long position to satisfy the contract specifications and 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.

BREAKING DOWN '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 on the cheapest to delivery security.

Futures Contracts on Bonds

A futures contract enters the buyer into an obligation to purchase a specific quantity of a particular underlying financial instrument. The seller must deliver the underlying on a date specified. In cases where multiple financial instruments can satisfy the contract based on the fact that a particular grade was not specified, the seller holding the short position can identify which instrument will be the cheapest to deliver.

Identifying the Cheapest to Deliver

Selecting the cheapest to deliver provides the investor in the short position the ability to maximize his return, or profit, on the bond chosen. The calculation to determine the cheapest to deliver is:

CTD = Current Bond Price – Settlement Price x Conversion Factor

The current bond price is determine based on the current market price with any interest due added to reach a total. Additionally, the calculations are more commonly based on the net amount earned from the transaction, also known as the implied repo rate. Higher implied repo rates result in assets that are cheaper to deliver overall.

Set by the Chicago Board of Trade, the Chicago Mercantile Exchange Group, the conversion factor is required in order to adjust for the varying grades that may be under consideration and is designed to limit certain advantages that may exist when selecting between multiple options. The conversion factors are adjusted as necessary to provide the most useful metric when using the information for calculations.

  1. Bond Futures

    Bond futures are financial derivatives which obligate the contract ...
  2. Wild Card Option

    A wild card option allows treasury bond, or treasury note, futures ...
  3. Contract Month

    The contract month is the month in which a futures contract expires.
  4. Implied Repo Rate

    The implied repo rate is the rate of return that can be earned ...
  5. Fail

    In common trading terms, a fail occurs if a seller does not deliver ...
  6. Futures Contract

    An agreement to buy or sell the underlying commodity or asset ...
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

    Examples Of Exchange-Traded Derivatives

    We look at some of the most common exchange-traded derivatives.
  3. Investing

    4 basic things to know about bonds

    Learn the basic lingo of bonds to unveil familiar market dynamics and open to the door to becoming a competent bond investor.
  4. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  1. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. Learn how futures contracts can be used to limit ... Read Answer >>
  2. Common examples of marketable securities

    Learn about marketable securities and the most common types of debt and equity securities, including common stock, bonds ... Read Answer >>
  3. What are managed futures?

    Managed futures are futures positions entered into by professional money managers, known as commodity trading advisors, on ... Read Answer >>
  4. What do the SP-500, Dow and Nasdaq futures contracts represent?

    A futures contract represents a legally binding agreement to pay or receive the difference between the current price and ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center