Explanation:
The cheapest-to-deliver bond among the four available bonds is Bond C. To find out the cheapest-to-deliver bond, we use the following formula:
Cost of delivery = Quoted bond price − (Last settlement price × Conversion factor)
Note: The last settlement price 95-16 is equivalent to 95 + 16/32 = 95.5
| Bond | Quoted bond price | Conversion factor | Cost of delivery |
|---|---|---|---|
| A | $99 | 1.011 | $99 − (95.5 × 1.011) = $99 − $96.55 = $2.45 |
| B | $97 | 1.001 | $97 − (95.5 × 1.001) = $97 − $95.60 = $1.40 |
| C | $103 | 1.069 | $103 − (95.5 × 1.069) = $103 − $102.09 = $0.91 |
| D | $107 | 1.072 | $107 − (95.5 × 1.072) = $107 − $102.38 = $4.62 |
The bond with the lowest cost of delivery is Bond C at $0.91, making it the cheapest-to-deliver bond.
Q.696 Henry Louis is a derivative investment manager at the Global First Investment Bank in Singapore. He manages a portfolio of fixed income assets and interest rate futures. He currently has a short position in a futures contract on GILTS (U.K. equivalent to U.S. Treasury securities). As the delivery month is approaching, the manager has to choose the cheapest-to-deliver bond from the four available bonds. If the last settlement price is 95-16, which of the following bond is the cheapest to deliver?
| Bond | Quoted bond price | Conversion factor |
|---|---|---|
| A | $99 | 1.011 |
| B | $97 | 1.001 |
| C | $103 | 1.069 |
| D | $107 | 1.072 |
A
A. Bond A
B
B. Bond B
C
C. Bond C
D
D. Bond D
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