Cheapest-to-Deliver Bond

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Hi, David.

Thanks for the nice video on the CTD treasury bond! It's very good.

I have a few questions after reading the textbook.

1. I'm a bit confused about the factors determining the CTD bond. (Hull, Chapter 6, page 135)
How do bond yields and shape of the curve affect the determination of the CTD bond? Is the duration of a futures contract most volatile when the yield is around 6%?

2. Conversion factor
How often does the conversion factor get declared for each bond for different delivery periods?

3. Is the "quoted bond price" a moving factor based on the supply and demand of the market? Based on the formula, it looks like a "set" price that would only change according the the change of time (maturity).

4. Also, what will impact the futures price? Market expectations on the interest rate movement? I think choice of CTD bond to be delivered and the time of delivery affect the duration of the futures contract but I'm not sure what will impact the price.

This is an interesting and confusing topic. It doesn't come intuitive for me.

Thanks for your help!!

Jessie

 

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Hi, everyone.

I'd really appreciate your feedback to my questions. I'm still confused about the CTD bonds.

Thank you.

Jessie

 

[Jiew Kwang]

Hi Jessie,

To be honest, I went into the level 1 exams without really getting a good intuitive feel on the CTD as well and 1 question came out. Fortunately, it was rather straightforward and the approach was given similar treatment as the sample exams provided by GARP.

Here's a short discussion i had recently: http://forum.bionicturtle.com/viewthread/4611/

Its been more than a month since i've taken part 1 and what I can salvage from the CTD bond is to learn the intuitive part and for me that was the party that has SHORT Treasury bonds would have to buy them from the open market to deliver to the LONG. He will be looking to minimize cost by buying the cheapest and delivering the most expensive bond.

If you found out an intuitive feel to CTD, please let me know! I would love to learn as well!

Regards,
jk

 

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Hey, JK!

Thanks for replying! The short discussion you had with David is helpful.

I'll share it with you if I can figure it out. It's a confusing topic.

Thanks!

Jessie