Explanation:
The cheapest-to-deliver bond among the four available bonds is Bond C.
Settlement price of 93-08 = 93.25
To find out cheapest-to-deliver bond we will use the following formula:
Cost of delivery = Quoted bond price − (Last settlement price × Conversion factor)
| Bond | Quoted Bond Price | Conversion Factor | Cost of Delivery |
|---|---|---|---|
| A | USD 102 | 1.018 | $102 - (93.25 \times 1.018) = \text{USD } 7.07$ |
| B | USD 103 | 1.071 | $103 - (93.25 \times 1.071) = \text{USD } 3.13$ |
| C | USD 103 | 1.089 | $103 - (93.25 \times 1.089) = \text{USD } 1.45$ |
| D | USD 104.50 | 1.062 | $104.50 - (93.25 \times 1.062) = \text{USD } 5.47$ |
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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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