Why cheapest to deliver

Save my name, email, and website in this browser for the next time I comment. Cheapest to Deliver Cheapest to deliver is a method that is used to estimate which is the least expensive future contract for a seller to deliver to its buyer.

It is the futures contract that consists of two parties a buyer and a seller. In the futures, the trader entered in a long position i. What is short selling? In the future market if the trader believes that in the future the price of the underlying asset will decline then he can enter into a short position in the futures contract and buy that asset when the price falls i.

The short seller earns profit from the difference between the price at which the asset is sold less the price at which the asset is bought.

Cheapest to Deliver only takes place in contracts that allow delivery of a variety of different securities. For example, the Treasury Bond Future Contract specifies a condition where the investor can receive any treasury bond if it is within a maturity span and has a specific coupon rate. In simple words, Cheapest to deliver is the most cost-effective security that can be delivered to an investor with a long position by an investor holding a short position and fulfill their obligation.

If that is the case, the seller is allowed to sell multiple financial instruments as long as it does not terminate the contract.

The issuer of the securities who has the short position can compare different types of financial instruments to decide which one will be the cheapest to deliver. The short position happens when an individual who sells the financial instrument plans on purchasing these assets back for a lower than the selling price in the future.

To put it in simple terms, the seller prefers a short position when they are certain that the rate of the asset or securities they are trading will fall in the future. Get More Updates!

Talk to our investment specialist Disclaimer: By submitting this form I authorize Fincash. Click Now. One of the biggest advantages of the futures trading market is that it gives traders a chance to have short positions whenever they wish.

It is really important for the investors and the issuers to find out the cheapest to deliver security for all kinds of short positions, as the market price and the value of the security delivered in the futures contracts are often different. This makes security trading quite interesting and profitable for the seller, as now they have the option to explore different securities and pick the cheapest security to be delivered.

It is often assumed that the short position offers the cheapest to deliver security. As mentioned above, the main reason why people choose the cheapest to deliver security is to maximize their profits on the bond contracts. Subscriber sign in You could not be signed in, please check and try again.

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