Cheapest-to-deliver
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Cheapest-to-deliver
/ˈʧiːpɪst tuː dɪˈlɪvə/ (adj.)
Of the range of valid alternatives available to you when performing a contract, the one that will cost you the least and irritate your counterparty the most should you choose it.
Any organisation whose contractual obligations can be fully understood in monetary terms is bound to do the utter bare minimum to discharge them.
It should not surprise anyone that the holder of a financial option will exercise it. Nonetheless, this did surprise purchasers of managed CDOs which loosely defined the obligations that could be used to value a credit event on a given Reference Entity. When the day of apocalypse against which they had bet arrived, they found it was being valued not against a freshly-issued, publicly quoted, liquid senior bond they were expecting but some deeply subordinated perpetual note issued in a private placement in 1975 on a short, typewritten and then repeatedly Xeroxed prospectus, which hadn’t traded since, and counted as “debt” by the skin of its teeth and no more.
When you take the other side of a financial contract, you must read it with peril-sensitive sunglasses.
Now this “cheapest-to-deliver” concept is no long-lost curio from the history of the structured credit market. Being a foundational premise of the agency problem, it is in turn a cornerstone of any service industry. You know, such as the financial services industry, or the legal services industry, and the consulting industry.
Any organisation to whom one outsources one’s operational framework for the long term will measure its success by how closely it can tack, on average, to the bare minimum whilst not too regularly over-stepping it.