Financial Risk Manager Part 1

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Explanation:

The cheapest-to-deliver (CTD) option allows the short position holder of the futures contract on a Treasury bond to choose which is the cheapest bond to deliver.

In a Treasury bond futures contract, the short position (the seller of the futures contract) has the right to choose which of the eligible bonds to deliver to the long position holder at settlement.
Due to the imperfection of conversion factors used by exchanges, one bond may be cheaper to deliver than another.
The short position holder will naturally select the bond that minimizes the cost of delivery (i.e., maximizes the proceeds from delivery), thereby exercising the CTD option.
The long position holder has no choice in the matter — they simply receive whatever bond the short position holder delivers.

Explanation:

The cheapest-to-deliver (CTD) option allows the short position holder of the futures contract on a Treasury bond to choose which is the cheapest bond to deliver.

In a Treasury bond futures contract, the short position (the seller of the futures contract) has the right to choose which of the eligible bonds to deliver to the long position holder at settlement.
Due to the imperfection of conversion factors used by exchanges, one bond may be cheaper to deliver than another.
The short position holder will naturally select the bond that minimizes the cost of delivery (i.e., maximizes the proceeds from delivery), thereby exercising the CTD option.
The long position holder has no choice in the matter — they simply receive whatever bond the short position holder delivers.

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Q.695 Since there is a large universe of Treasury bonds and futures contracts on those bonds, there is a large number of Treasury bonds available to be delivered at any point in a month. However, due to the imperfection of conversion factors used by exchanges, at times it is cheaper to deliver one bond as compared to another bond. Which of the following options truly defines the cheapest-to-deliver option?

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Last updated: July 21, 2026 at 02:10

The cheapest-to-deliver option allows the long position holder of the futures contract on a Treasury bond to choose which is the cheapest bond to receive.

The cheapest-to-deliver option allows the long position holder of the futures contract on a Treasury bond to choose which is the cheapest bond to deliver.

The cheapest-to-deliver option allows the short position holder of the futures contract on a Treasury bond to choose which is the cheapest bond to receive.

The cheapest-to-deliver option allows the short position holder of the futures contract on a Treasury bond to choose which is the cheapest bond to deliver.