Fixed Income · Core
Cheapest to Deliver
Cheapest-to-deliver is the bond a futures (or CDS) seller will deliver because it minimizes their cost — the option that sits inside the contract.
Definition
Bond futures allow a basket. Conversion factors make them notionally equivalent; the CTD is the one with the highest implied repo / lowest net basis. CDS auctions have a CTD among defaulted obligations.
Why it matters
Futures duration and basis trades are CTD trades. A switch of CTD changes the hedge ratio overnight.
Case
A curve move flips CTD from a 7-year to a 10-year in the TY basket. DV01 of the contract jumps. The ‘10-year future’ was a basket option.
How to read it
Net basis, implied repo, and switch risk. Do not hedge a future as if it were a single on-the-run.
No query has been run yet. Which is tragically normal for most knowledge systems, but we are trying to evolve past decorative databases.