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.
References in periodicals archive ?
Similar to Treasury futures, TBAs trade on a "cheapest-to-deliver" basis.
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.