Explanation:
The CTD (cheapest-to-deliver) bond minimizes the following expression:
Cost of Delivery = Quoted bond price − (QFP × CF)
Where:
$96.25Computing the cost of delivery for each bond:
$0.83 ✓ (lowest)$4.58$1.13$1.31Since Bond 1 has the lowest cost of delivery at $0.83, it is the cheapest-to-deliver bond. The short position party will choose to deliver Bond 1 because it minimizes the cost while still fulfilling the futures contract obligation.
Q-693. An investor with a short position is about to deliver a bond and has four bonds to choose from which are listed in the following table. The last settlement price (quoted futures price) is $96.25. Determine which bond is the cheapest-to-deliver.
| Bond | Quoted bond price | Conversion factor |
|---|---|---|
| 1 | 99 | 1.02 |
| 2 | 122 | 1.22 |
| 3 | 107 | 1.1 |
| 4 | 112 | 1.15 |
A
Bond 1
B
Bond 2
C
Bond 3
D
Bond 4
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