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An Investigation of Cheapest to Deliver on Treasury Bond Futures Contracts

Posted: 21 Jun 1998  

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Simon Benninga

Tel Aviv University - Faculty of Management

Date Written: May 1996

Abstract

An extensive cheapest-to-deliver (CTD) literature has become mired in the misconception that the CTD is characterizable in terms of duration. We show that exceptions to the duration rule contain many economically relevant scenarios. Our conclusions may be summarized as follows: 1. Independent of the term structure, the CTD has either the highest or lowest coupon of all deliverable bonds. 2. The CTD maturity is the shortest deliverable maturity if the rate is less than 8%. On the other hand, when the market rate is greater than 8%, the CTD maturity is the largest deliverable maturity when the optimal coupon is greater than 8%; if the optimal coupon is less than 8%, the CTD maturity can have an interior optimum. 3. In contradistinction to the prevailing (and published) belief, the CTD is, in many economically relevant cases, not a bond with extremal duration. 4. While conclusion (2) is derived for flat term structures, we prove that it must hold as the only economically plausible limiting case for all term structures.

JEL Classification: G13

Suggested Citation

Wiener, Zvi and Benninga, Simon, An Investigation of Cheapest to Deliver on Treasury Bond Futures Contracts (May 1996). Available at SSRN: https://ssrn.com/abstract=7502

Zvi Wiener (Contact Author)

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
(972)-2-588-3049 (Phone)
(972)-2-588-3105 (Fax)

HOME PAGE: http://pluto.mscc.huji.ac.il/~mswiener/zvi.html

Simon Benninga

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
+972-3-640-6317 (Phone)
+972-2-673-4675 (Fax)

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