Use Case — Duration Hedging

PM question

The portfolio has excess rate sensitivity. How much DV01 must be removed?

Concepts

duration, DV01, hedge instrument DV01, hedge ratio.

First exercise

Portfolio DV01 = +$120,000/bp. Hedge instrument DV01 = +$80/bp per unit.

Hand-calculate required short units: units = portfolio_DV01 / hedge_DV01_per_unit

Extend

Add key-rate durations and show why a single-duration hedge can leave curve basis risk.