Eurodollar Futures (GE)--anyone else trading these?

Quick question. I know most of you will say that the best hedges for the Eurodollar is another calendar month, but if I want to hedge with say 5 or 2 year notes, any idea how I find the right ratio?
I've always traded equity spreads and am finding a similar "stretch" and then snap back in the 5yr against the eurodollar. Nice for some quick ticks sometimes but I'm unsure of a ratio. I've been trading it 1:1 but I know thats off.

 

BIX Can you clarify exactly what it is your talking about?

 

well, cheap vs rich in a nutshell is a relationship between implied and realized vols. Historically you can evaluate it using volatility cones and a few more methods, in a sense you need to see wether you think you'll make up your theta bleed on gamma. i'll send you an message with some XL snippets.

as for midcurve cheapness - it appears that in a steep curve environment people underestimate the value of midcurve gamma and overestimate the value of forward vol. my gut tells me it has something to do with how the future picks up vol while rolling down the curve, but I need to think a bit more about it.

 

I'll appreciate that, sle. Coincidentally I'd just begun to look at that strategy.

I first learned of vol cones from Burghardt's work , but yet to find a cheap source of data that covers the mid-curves well. The short-dated ED futures exhibit less vol than long-dated - perhaps I misunderstand yr comment about futures gathering vol when rolling down? We're a bit off-topic here, welcome your clarification via pm.

 

Can anyone help on my prior question about hedging? 2 and 5 yr against the Ed.

 

ok, here you go with the simple one: for each contract in your strip, increase futures rate by 1 bp and calculate the new implied eurodollar yield (product of all discount factors). Increase the note yield by the change in implied ED yeild from step one, calculate new price of the note. Take new price minus the old price and divide by $25 - a number of contracts for this particular future. How's that?

ps. when I feel a bit better, I'll try to make up a spreadsheet with correlation-based hedge, (the usual ratio=correlation * volE/volT) that's a bit better.

 

bix I am trying to look this rule up and cant find anyhting. Can you explain to me what it is all about?
Thanks

 

I'll post it here later today...

 

thanks bix.

 

They don't have an online listing of this rule change yet, but I have a hard copy...if anyone wants it faxed, let me know.