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Cheapest to deliver

R

r_v.s

Member
Would you pls explain this concept of cheapest to deliver stock?

If I have a bond or equity future, am i not expected to trade in that particular instrument? How does the cheapest to deliver idea fit it here??
 
Some types of futures contracts allow for a variety of slightly different underlying securities that may be delivered. Eg government bond futures contracts typically specify that any government bond can be delivered, so long as it is within a certain range of maturity dates/coupon rates.

So, the price of the future assumes that, when the deal is settled, the seller will choose to fulfill the contract using the cheapsest security on the market that satisfies these contract specifications.
 
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