Financial Risk Manager Part 1

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Explanation:

To identify the cheapest-to-deliver bond, compare the short’s delivery cost for each bond:

\text{Delivery cost} = \text{Bond price} - (\text{Futures price} \times \text{Conversion Factor})

Using the quoted futures settlement price of 106.125:

Bond A:
$106.125 \times 0.87 = 92.30625$
Cost to deliver:
$88.00 - 92.30625 = -4.30625$
This means the short profits by about $4,306 per $100,000 contract.
Bond B:
$106.125 \times 1.13 = 119.90625$
Cost to deliver:
$113.00 - 119.90625 = -6.90625$
This means the short profits by about $6,906 per contract.

Bond B gives the larger profit (or, equivalently, the lowest delivery cost), so it is the CTD.

Explanation:

To identify the cheapest-to-deliver bond, compare the short’s delivery cost for each bond:

\text{Delivery cost} = \text{Bond price} - (\text{Futures price} \times \text{Conversion Factor})

Using the quoted futures settlement price of 106.125:

Bond A:
$106.125 \times 0.87 = 92.30625$
Cost to deliver:
$88.00 - 92.30625 = -4.30625$
This means the short profits by about $4,306 per $100,000 contract.
Bond B:
$106.125 \times 1.13 = 119.90625$
Cost to deliver:
$113.00 - 119.90625 = -6.90625$
This means the short profits by about $6,906 per contract.

Bond B gives the larger profit (or, equivalently, the lowest delivery cost), so it is the CTD.

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MManit

Last updated: April 18, 2026 at 11:32

Bond A is the CTD because it costs the short only $900 per contract to deliver

42.9%

Bond A is the CTD because it profits the short $2,125 per contract to deliver

42.9%

Bond B is the CTD because it costs the short only $4,329 per contract to deliver

Bond B is the CTD because it profits the short $6,921 per contract to deliver

14.3%