Point: The cheapest delivery is the cheapest securities that can be delivered to long positions in futures contracts to meet the contract specifications. This is very common in treasury bond futures contracts. Determining the cheapest securities delivery is very important for short positions, because there is a difference between the market price of securities and the conversion coefficient used to determine their value.
Futures contracts require buyers to purchase a specific number of specific basic financial instruments. The seller must deliver the underlying securities on the date agreed by both parties. If a variety of financial instruments can meet the contract based on the fact that no specific grade is specified, the seller holding a short position can determine which financial instrument has the lowest delivery cost. Remember that when traders sell financial assets and intend to buy them back at a lower price later, they usually hold short positions or short positions. When traders think asset prices will fall in the near future, they usually short their positions. The futures market allows traders to short positions at any time.
Determining the cheapest delivery securities is very important for short positions, because there is usually a difference between the market price of securities and the conversion coefficient used to determine the value of delivery securities. This allows the seller to choose a specific security to deliver another security. Because short positions are assumed to provide the cheapest delivery securities, the market pricing of futures contracts is usually based on the cheapest delivery securities.
Investors can get the maximum return or profit on the selected bonds by choosing the cheapest delivery to short. The calculation method for determining the cheapest delivery is: CTD = current bond price? Settlement price x conversion factor
The current bond price is determined according to the current market price, including the total interest. In addition, the calculation is more commonly based on the net amount earned from the transaction, also known as the implied repo rate. This is the rate of return that traders can get when they sell bonds or futures contracts and use borrowed funds to buy the same assets at market prices. Higher implied repo rate leads to lower overall delivery cost of assets.