utures contracts in Government National Mortgage Association (GNMA) F passthrough certificates were introduced on the Chicago Board of Trade (CBT) in 1975. Two types of contracts exist. The GNMA Collateralized Depository Receipt (CDR) future delivery vehicle is a CDR backed by GNMA certificates. The Certificate Delivery GNMA future delivery vehicle is a specific "batch" of GNMA certificates. The Chicago Board Options Exchange (CBOE) had planned to initiate trading in put and call options on GNMA certificates in the fall of 1982, but the establishment of these instruments has been postponed.
GNMA passthroughs exist in a wide variety of coupon and maturity specifications. It would be manifestly impractical to establish futures and options for each GNMA issue (or "pool"). Instead, a system of "equivalent delivery" has been established for futures and proposed for options. There are rules that stipulate acceptable quantities of GNMA certificates and associated terms necessary to satisfy futures and options obligations. The rules specify a "contract grade" which delineates the set of acceptable securities and then sets forth delivery equivalence within grade as a function of coupon. The specific coupon associated with a GNMA futures contract or option is called the par grade security. For all contracts, the current par grade coupon is %%.
There is no assurance that the equivalent delivery rules are neutral in an economic sense. Indeed, there will often be a "best coupon to deliver" in the sense that the controlling party (the futures short, the call short, or the put long) is able to achieve the maximum return within the set of contract grade securities. In this article the futures and (proposed) option delivery procedures are briefly characterized. Next the influence of the relationship between coupon and yield to maturity upon the determination of the best coupon to deliver for each instrument are investigated. Numerical illustrations are provided to indicate the dollar cost of nonoptimal delivery. Finally, the implications of these findings as they relate to trading and valuation are discussed.