Other Aspects of the Delivery Process

The delivery process for CBT Treasury bond futures has some other interesting complications. As with most futures contracts, there is a delivery month.⁴ The short position has the option to deliver at any point during the month.

In the beginning of the month, the settlement price for that day is used for deliveries initiated on that day. On the seventh business day before the end of a delivery month, the settlement futures price is determined and this price is used for computing the invoice price for deliveries made in the rest of this delivery month. The fixing of the futures price gives the short an option to choose the day for delivery. This delivery option may turn out to be quite valuable. If the futures price is fixed at 90, 7 days before the end of the month, and spot prices subsequently decline, the short may be able to buy a deliverable bond for much less than its invoice price and deliver it for a profit. If bond prices subsequently rise during the last ....