Use Case — Swap DV01 Hedge

PM question

The portfolio needs to shed 5 years of duration without selling cash bonds (liquidity, tax, or index-tracking constraints). Size a pay-fixed swap to do it.

Concepts

swap DV01, hedge ratio, swap spread.

First exercise

Portfolio DV01 = +$200,000/bp. 5-year swap DV01 = $43/bp per $1mm notional (from swap_dv01, data/mock_curve.csv's 5Y swap_rate).

Hand-calculate the pay-fixed notional needed: notional_mm = hedge_ratio(portfolio_dv01, swap_dv01_per_mm)

Extend

Add the swap spread move as a second scenario: if swap spreads widen 10bp while Treasury yields are unchanged, does the hedge's basis risk help or hurt versus a Treasury-future hedge for the same DV01?

Relevant reference pages

reference/fixed_income/swap_dv01.md
reference/fixed_income/swap_spread.md