Cheapest to Deliver - CTD
Categories: Company Management
Also known under the acronym "CTD," Cheapest to Deliver describes a situation where there are options from which to choose on a long position to satisfy a short position trade in futures contracts...and, more often than not, on Treasury bond futures.
In Treasury bonds, the proliferation of paper at similar maturities and coupons can often lead to arbitrage situations based on odd lot positions, which will make two Treasuries of comparable coupon and maturity date bear different market prices among broker dealers. This can result, for example, from a 5-year 2.2% Treasury maturing on 7/31/2022...and a 10-year 2.2% also maturing on 7/31/2022, in which the 5-year may be cheaper to deliver, as it's from an odd lot, whereas the 10-year was purchased mostly in whole lots at issuance, and odd lots are not as easy to come by.
An analogy can be made with hiring a wedding band. As long as two different wedding bands can play the required list of song choices by the newlywed couple and both bands are available to perform on the wedding day...if "A" charges $1,500 and "B" charges $1,350, "B" would be CTD. However, if either were to play Hava Nagila at a non-Jewish wedding, it would be justifiable grounds for nonpayment.
