Answer-first summary for fast verification
Answer: Bond B is the CTD because it profits the short $6,921 per contract to deliver
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**.
Author: Manit Arora
Ultimate access to all questions.
The settlement date is March 4th, 2011 and the settlement price is 106-04 (i.e., 106.125). The two bonds eligible for delivery are:
$88.00;$113.00All bonds pay coupons on January 1st and July 1st (Numbers are approximately accurate but rounded for convenience). Which bond is the cheapest-to-deliver (CTD)?
A
Bond A is the CTD because it costs the short only $900 per contract to deliver
B
Bond A is the CTD because it profits the short $2,125 per contract to deliver
C
Bond B is the CTD because it costs the short only $4,329 per contract to deliver
D
Bond B is the CTD because it profits the short $6,921 per contract to deliver
No comments yet.