Definition
Cheapest to deliver (CTD) is the specific security that a short holder chooses to hand over to satisfy a futures delivery obligation when more than one eligible instrument can be delivered. The short will normally pick the instrument that minimizes their net cost (or, equivalently, maximizes their implied financing return), so that choice often drives how the futures contract is priced.
Why CTD matters (short version)
– Treasury futures and similar contracts permit delivery from a range of bonds that meet broad criteria (maturity window, coupon characteristics).
– Because different bonds have different market prices and coupons, the short can choose which one to deliver.
– Market participants therefore price futures with the market’s expected CTD in mind; a change in which bond is CTD can shift futures-bond relationships (the basis).
Key concepts and formulas (defined)
– Long