What's the theoretically correct way to do this? I can't work out what ratios to use. Are there any tutorials on the web?
easy as pi, though there are a few ways to do it. first you need to realized that it's and imperfect hedge because of convexity premium. The real right way would be to build a yield curve out of EIBOR futures, price the swap note and bump each futures price. Given lack of desire to do so, you can think that hedge ratio would be HR(future X) = Notional * (1bp * Daycount) * DF(X) / Tick Value where you'd calculate your discount factor as a DF(X) = (1 + StubRate * days to next IMM) * Product (1 to X) (1 + F(i)) Alternatively, you can use the discount factor calculated from the spot EIBOR rate (up to 1y, that is). I can send you a spreadsheet, if you really want to. What's the point of the whole thing - are you trying to take advantange of convexity premium?