[ 2009 FRM Sample Exam ] Market risk measurement and management Q10

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The cheapest?to?deliver bond is the one for which

Quoted price ? (quoted futures price * conversion factor)

is least.

The delivery values of the four bonds are:

       Bond A: 125.69 ? (95.5 * 1.1979) = 11.29

       Bond B: 90.31 ? (95.5 * 0.8109) =12.86

       Bond C: 87.6 ? (95.5 * 0.8325) = 8.10

       Bond D: 128.56 ? (95.5 * 1.2249) = 11.58

Bond C is the smallest and is the cheapest?to?deliver.

Reference: John Hull, Options, Futures, and Other Derivatives, 5th ed. (ffice:smarttags" />New York: Prentice Hall, 2003), Chapter 5.

Type of Question: Market Risk