Cheapest-to-deliver

Questions such as the uses to which European bond futures can be put, contract specifications and trading volumes are discussed with illustrative examples. Technical issues, which surround the use of bond futures, are also examined and presented with numerical examples. The issues include the calculation of gross and net basis, identifying the cheapest-to-deliver (CTD) cash market bond, different approaches to measuring relative volatility, calculating hedge ratios, and portfolio duration adjustment. Bloomberg screen output is used to provide a real world flavour to the topics covered. 

It is important to note that the bond that will eventually be delivered into the contract, and the date on which it will be delivered, will be decided by the seller of the futures contract. This flexibility on the part of the seller allows him or her the possibility of selecting a bond that will be the cheapest-to-deliver (CTD). 

At the time, the June 2003 Euro-BUND future is trading at 116.42, and the cheapest-to-deliver (CTD) bond for the June 2003 futures contract is the 5% bond maturing on 4 January 2012, and having a conversion factor of 0.9341. The PVBP (or DVOl) for the CTD bond is 0.0788, while that for the bond actually held is 0.0840. The hedge ratio for the bond portfolio is therefore... 

In practice, the spread information from the CDS market is used to imply the probability of default and the hazard rate for the underlying reference entity. The recovery rate is an input when the calculation of implied probabilities takes place. It is common to assume a recovery rate that reflects the rate on the cheapest to deliver deliverable obligation. Credit derivative traders will monitor the prices of the cheapest to deliver bonds (i.e., deliverable obligations with the lowest recovery), when constructing hedges. 

In this analysis, we assume that the assumed recovery rate for the cheapest to deliver bond remains the same at 35% of notional value. 

In a credit default swap, the protection buyer is effectively long a delivery option. This delivery option gives the protection buyer the opportunity to deliver the cheapest to deliver asset to the protection seller. 

FIGURE 6.5 Bloomberg Screen Shows the Cheapest to Deliver for September 2003 U.S. Long Bond Futures Contract ... 

The conversion factor equalizes each deliverable bond to the futures price. The bond with the lowest gross basis is known as the cheapest to deliver. 

Options price sensitivity is different from that of other financial market instruments. An option contract s value can be affected by changes in any one or any combination of the five factors considered in option pricing models (of course, strike prices are constant in plain vanilla contracts). In contrast, swaps values are sensitive to one variable only—the swap rate—and bond futures prices are functions of just the current spot price of the cheapest-to-deliver bond and the current money market repo rate. Even more important, unlike for the other instruments, the relationship between an option s value and a change in a key variable is not linear. 

The notional maturity of a long-bond contract is always given as a range for the contract on the 10-year note, for example, it is six to ten years. The duration used to calculate the hedge ratio would be that of the cheapest-to-deliver bond. 

For descriptions and analyses of bond futures contracts, basis, implied repo, and the cheapest-to-deliver bond, see Burghardt et al. (1994). Fiona (1996) is a readable treatment of the European government bond basis. 

The questions of market insecurity and market price reminds me of a study the ESCOE recently completed. We were asked to do a coal fuel cycle study. The study was an examination of all the possible ways that coal from a mine could be processed and transported to deliver energy to "the city gate." After many, many pages of looking at all of the alternatives and the best estimates of price that go along with these, we were asked if it was possible to reduce the study conclusions to a single sentence. The answer is "Yes. The cheapest way to use coal is to burn it."... 

Manufacturers of other wood panels seek the cheapest possible wood. They are able to utilize lower quality logs and wood residues from other wood processing industries and still produce homogeneous boards with adequate mechanical and physical properties. Typically, the delivered cost of sawlogs, peeler logs and chipwood account for around 80-60%, 60-40% and 40-15% respectively of the production costs of lumber, plywood and boards made from comminuted wood. 

Cold Backnp Site It is also known as offline backup, hi this site, data is often only replicated on a periodic basis, leading to an RPO of hours or days. It can be diflicnlt to snpport business continuity with cold backup sites, but these are cheapest options for applications that do not require strong protection or availability gnarantees. With a cold backup site, everything that is required to restore service must be delivered to the site making restoration efforts from the cold backnp site to Ml operation tedious and time consuming. It is the best suited metric for the education department. 

Nowadays, there is a multitude of GPS receivers available off the shelf, ranging from very accurate, bulky, and relatively expensive geodetic receivers " all the way to hand-held and wrist-mounted cheap receivers. The cheapest receivers use the C/A-code ranging (to several satellites) in a point-positioning mode capable of delivering an accuracy of tens of meters. At the other end of the receiver list, the most sophisticated geodetic receivers use both carriers for the ranging in the differential mode. They achieve an accirracy of the interstation vector between a few millimeters for shorter distances and better than S 0 where S stands for the interstation distance, for distances up to a few thousand kilometers. 

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