Use Case — Treasury Futures Hedge

PM question

The portfolio's DV01 is too high going into an event risk window. Hedge it with liquid Treasury futures instead of trading cash bonds.

Concepts

futures DV01, conversion factor, hedge ratio.

First exercise

Portfolio DV01 = +$120,000/bp. CTD bond DV01 per contract = $145/bp, conversion factor = 0.92.

Hand-calculate: 1. futures_dv01 = futures_dv01_per_contract(ctd_dv01_per_contract, conversion_factor) 2. contracts = hedge_ratio(portfolio_dv01, futures_dv01)

Extend

The cheapest-to-deliver bond changes as yields move. Re-run the hedge with a different CTD DV01/conversion factor and show how many contracts of hedge drift result — purely from the CTD switch, with no trading.

Relevant reference pages

reference/fixed_income/treasury_futures_hedging.md