Cheapest to Deliver

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Cheapest to Deliver

The individual units of an underlying asset that would be least expensive for the seller of a futures contract to deliver to the buyer. Some derivatives specify the quality of product that the seller must deliver. If there is no specification, the seller has the right to deliver any quality and still fulfill the requirements of the contract. In such a case, the rational seller will always deliver the CTD. This may be a product of lower quality, and the price of such a futures contract will reflect this.
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17) Compounding this cheapest-to-deliver effect, the fact that the TBA seller effectively receives a valuable option well before settlement date to choose at settlement which bonds will be delivered, after additional information about the value of each security has been realized, further reduces the equilibrium price of the TBA contract relative to the value of an average MBS deliverable into that contract.
TBA trading effectively applies a common cheapest-to-deliver price level to an intrinsically diverse set of securities and underlying mortgages.
Because of the incentives associated with cheapest-to-deliver pricing, not all eligible MBS pools actually trade on a TBA basis.
According to conversations with market participants, a significant volume of physical delivery of securities occurs through the TBA market because, for many securities, the liquidity value of TBA trading generally exceeds any adverse-selection discount implied by cheapest-to-deliver pricing.
The new release includes important enhancements such as market correlation calibration for hybrid modeling and dual-curve stripping capabilities consistent with the cross-currency market including cheapest-to-deliver curve construction.
F3's enhanced dual-curve stripping for OIS and Libor rates as well as cheapest-to-deliver discounting for multi-currency CSAs take into account meeting dates such as ECB, smoothing methodologies and turn pressure.
The cheapest-to-deliver curve functionality will construct a curve based on specific collateral agreements and numeraire currencies.
com), the leading provider of cross-asset analytics for derivatives valuations and risk management, today announced new functionality for Cheapest-To-Deliver (CTD) curve construction and the analysis of collateral.
The solution supports various currencies and collateral types, and covers the construction of OIS Curves, IR swap curves, Basis curves, XCCY basis curves and Cheapest-To-Deliver Curve - a blended collateral discounting curve that is optimized through the trade lifecycle among the various currency collateral curves.
With respect to other risks such as cheapest-to-deliver risk, Senior Director Bill May said, "Based on Fitch's research for which LSTA provided important data and feedback, there appears to be little evidence of systemic cheapest-to-deliver risk inherent in LCDS, as evidenced by the convergence in pricing of term loans and revolvers post-bankruptcy.
Key concepts such as cheapest-to-deliver bonds, implied repo rates and conversion factors are discussed in detail.
For credit swaps including restructuring using the new supplement, the new provision would, in certain circumstances, limit the maturity of the obligations that are deliverable after the occurrence of a restructuring credit event, thereby limiting the so-called cheapest-to-deliver option that has caused problems following recent restructuring events.