CHEAPEST TO DELIVER (CTD)
Back to GlossaryDefinition
In bond futures, the specific bond that minimizes the cost to the short when fulfilling delivery obligations.
Summary
The Cheapest to Deliver (CTD) is the specific bond that a futures contract seller (short position holder) will choose to deliver when the contract expires, because it costs them the least money. In bond futures contracts, the seller usually has a choice of several different bonds they can deliver to fulfill their obligation. They will naturally pick the one that gives them the best financial outcome - meaning the bond where the delivery price they receive minus the bond's market price is maximized, effectively minimizing their net cost.
Usage Context
Understanding CTD is crucial when studying bond futures pricing, arbitrage strategies, and derivatives risk management. It's particularly important for understanding why bond futures don't always move exactly with any single underlying bond price.
Common Confusions
- Thinking the long position holder chooses which bond to receive
- Confusing 'cheapest' with lowest price rather than lowest net cost to deliver
- Not understanding that the CTD can change as market conditions change
- Assuming all eligible bonds are equally likely to be delivered
- Mixing up the delivery price calculation with the spot price of the bond
