Explanation:
The cheapest-to-deliver (CTD) bond is the one that minimizes the cost of delivery for the short party. The cost of delivery is calculated as: Cost of Delivery = Quoted Bond Price - (Settlement Price Conversion Factor)
The settlement price is given as 93-08, which translates to $93 + \frac{8}{32} = 93.25$.
Calculating the cost for each bond:
$102 - (93.25 \times 1.018) = 102 - 94.9285 = 7.0715$$103 - (93.25 \times 1.071) = 103 - 99.87075 = 3.12925$$103 - (93.25 \times 1.089) = 103 - 101.54925 = 1.45075$$104.50 - (93.25 \times 1.062) = 104.50 - 99.0315 = 5.4685$Bond C has the lowest cost of delivery (1.45075), making it the cheapest-to-deliver.
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Q.51 Blake Young is a derivative investment manager at Yankee Bank based in New York City. He manages a portfolio of fixed income assets and interest rate futures. He currently has a short position in a futures contract on GILTS, the U.K. equivalent to U.S. Treasury securities. As the delivery month is approaching, Young’s manager has to choose the cheapest-to-deliver bond from the four available bonds. If the last settlement price is 93-08, which of the following bond is the cheapest-to-deliver?
| Bond | Quoted Bond Price | Conversion Factor |
|---|---|---|
| A | USD 102 | 1.018 |
| B | USD 103 | 1.071 |
| C | USD 103 | 1.089 |
| D | USD 104.50 | 1.062 |
A
Bond A
B
Bond B
C
Bond C
D
Bond D
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