How Treasury Futures Delivery Options Change After Trading Ends

Summary

The document contrasts the end-of-month delivery option in Treasury futures with the switch option before and after futures trading ends. Before expiry, the futures price remains variable and is driven mainly by the converted price of the cheapest-to-deliver bond, while relative price movements among all deliverable bonds also matter. This means the delivery decision interacts with changes in both the futures contract and the bond basket.

After expiry, the futures price is fixed, but the holder retains an additional week in which to choose another bond for delivery. The relevant incentive then shifts toward selecting the bond whose price movement best reduces delivery cost, focusing on the largest or smallest moves as appropriate. The explanation is brief and qualitative: it does not quantify option value, discuss yield scenarios in detail, or provide worked examples of how the cheapest-to-deliver bond changes.

Key ideas

• Before expiry, Treasury futures prices continue to move with the cheapest-to-deliver bond and the deliverable basket.
• Relative price changes among deliverable bonds can affect the futures price before trading ends.
• After expiry, the futures price is fixed while a further delivery choice remains available.
• The post-expiry choice focuses on bond price movements that minimize delivery cost.
• The document gives a qualitative distinction without a numerical valuation or yield example.

Tags

# Understanding end-of-month options embedded in Treasury Futures


# Understanding end-of-month options embedded in Treasury Futures












I'm struggling to understand the end-of-month option embedded in Treasury Futures. Specifically, I'm looking at what would happen to CTD when yields rise or fall.

What are the main differences between the end-of-month option and the switch option before the end of trading for treasury futures?

I read in [Burghardt Belton Lane & Papa] that the end-of-month option behave quite differently from switch options before end of futures trading but I don't quite see how.

## Answer by user68819 (score 1)

https://quant.stackexchange.com/a/76605

Prior to expiry the futures price is a variable. It changes mostly following the converted price of the ctd but also based on the relative prices of the instruments in the basket which are deliverable.

Post expiry, the futures price is fixed. But, you have another week within which you have the right to deliver another bond. But in this case you are more interested in the greatest or smallest moves to minimise your cost of delivery.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.