What is ‘Most successfully To Deliver’
Best to deliver is the security delivered by the short position holder in a futures shrink, and which is considered the most optimum for the position holder in terms of profitability. Best to hand over is associated with securities that have yields, such as checks, and is a component of a quality option or switching option. Futures contracts identify which types of bonds, securities, or other goods are considered adequate to deliver.
Breaking Down ‘Best To Deliver’
Investors who take the snappish position in a futures contact may be able to realize more profit by changing the compact that is delivered. The investor will seek to change the quality of the checks, while still delivering an acceptable security. The security that is examined the best to deliver may change over time, as different yields and durations mutate the value of the security.
As the yield on a security changes, so too will the value of the pledge that is set to be delivered as part of a futures contract. An investor that has entranced the short position on a futures contract is required to deliver a security at a set out period of time—after the futures contract expires—but has the ability to select between different durations and different yields when determining which careful security to deliver.
This is acceptable because certain futures pacts allow for a slight variation in the product delivered. Treasury bonds can be ransomed within certain maturities and certain coupon rates, and are still heeded valid for delivery of the contract.
Best to Deliver Example
An investor may maintain taken a short position in Treasury bond futures, and is required to launch the bond outlined in the futures contract to the contract buyer when that corrugate expires. If the term structure of the bonds change it may become more cost-effective for the investor to deliver a different bond. Term structure is the relationship between catch rates and various bond maturities. The investor has the option to make the alteration or continue to deliver the specific bond in the futures contract.
The short proposition may also consider the cheapest to deliver. This is the bond that is the cheapest safe keeping allowable to be delivered by the short position to the futures contract buyer.
A- to deliver may also be used in the delivery of physical goods, such as commodities. A days contract involving corn may allow the short position holder to transfer different grades of corn within a certain tolerance (the quality selection), and may also allow the investor to deliver to different locations (the location opportunity).