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 ?
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.