7) The cheapest-to-deliver concept is associated with the expiration of US Treas

Question

7) The cheapest-to-deliver concept is associated with the expiration of US Treasury TNote and T-Bond futures. Why does this concept exists and for what purpose?

a. Derivative contracts must be standardized to insure liquidity. The contracts are altered, prior to expiration to allow various bonds to meet delivery requirements in terms of notional value. b. The concept exists simply because of the various characteristics of bond issues and the desired large supply of standardized derivative contracts.

c. The concept exists so that traders can quickly arbitrage inefficient pricing and Clearinghouses can conduct margin calls.

d. Cheapest-to-deliver is a concept that is held over from previous market practices but is adhered to today. Eventually the factor will be removed from derivative pricing.

e. None of the above

Explanation / Answer

Derivative contracts must be standardized to insure liquidity. The contracts are altered, prior to expiration to allow various bonds to meet delivery requirements in terms of notional value.

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