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Cheapest to Deliver Bond

 

  • At any given time during the delivery month there are many bonds that can be delivered in the CBOT futures contract
  • The party with the short position can chose to deliver the cheapest bond when it comes to delivery, hence he would chose the cheapest to deliver bond
  • Net pay out for delivery ( he has to buy a bond and deliver it):
    • Quoted bond price – (settlement price * conversion factor)
    • Consider an example in the table below where the short position holder has 3 options for delivery.
    • His cheapest to deliver bond is Bond 2

Cheapest to Deliver Bond (All figures in $)

Settlement Future Price: 94.23

Bond

Quoted Bond Price

Conversion Factor

1

99.6

1.033

2

135.67

1.432

3

122.45

1.257

 

Cost of Delivering ($)

Bond 1

99.6 - (94.23*1.033) =

2.26041

Bond 2

135.67 - (94.23*1.432) =

0.73264

Bond 3

122.45 - (94.23*1.257) =

4.00289

 





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