Final answer:
To determine the cheapest bond to deliver, we need to calculate the invoice price for each bond. The cheapest bond to deliver is Bond 3 with an invoice price of 113-00.28.
Step-by-step explanation:
To determine the cheapest bond to deliver in the context of futures trading, the invoice price for each bond is calculated by multiplying the futures price by the conversion factor. Let's examine the invoice prices for Bonds 1 through 4:
1. Bond 1: Invoice price = 101-12 * 1.2131 = 123-19.95
2. Bond 2: Invoice price = 101-12 * 1.3792 = 140-01.34
3. Bond 3: Invoice price = 101-12 * 1.1149 = 113-00.28
4. Bond 4: Invoice price = 101-12 * 1.4026 = 142-15.13
The calculation reveals that the cheapest bond to deliver is Bond 3, with an invoice price of 113-00.28. The invoice price represents the amount an investor would pay for the bond when it is delivered against a futures contract. In this context, the lower invoice price for Bond 3 makes it the most economical option for delivery.
Understanding the cheapest-to-deliver bond is crucial for market participants in futures contracts. It helps traders optimize their positions, making informed decisions to maximize profitability and efficiency in the bond market. By comparing the invoice prices of different bonds, traders can identify the most cost-effective option for fulfilling their delivery obligations in the futures market. In this scenario, Bond 3 stands out as the most economical choice among the options provided.