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ZB ZN ZF ZT ED Hedge Ratios

Discussion in 'Financial Futures' started by CPTrader, Aug 21, 2009.

Hello,

These instruments are fairly correlated. If one was attempting to create a "rough" hedge betwen those instruments what would be the best approach to calculate the hedge ratios. So for example, if you ar elong 1 ZB, how many ZT should you short?

In essence what would be hedge ratios for

ZB:ZN
ZB:ZF
ZB:ZT
ZB:ED
ZN:ZF
ZN:ZT
ZN:ED
ZF:ZT
ZF:ED
ZT:ED

Agian I stress i know in addition to correlation there are other factors, duration, volatility, liquidity, etc...but for these purposes I am just looking for an appropriate "rough" hedge ratio. I also know thare are many methods, simple to complex to calculate these ratios , but I am curious as to what people use. I would expect there would be a quick/simple way to achieve a rough hedge ratio for the six pairs above.

Glad to hear people's thoughts on this.

Thank you.

2. Martinghoul

Well, ultimately an "appropriate hedge ratio" would depend on what it is that you're trying to hedge.

Most people trading these spreads seek to have a position that is neutral in terms of outright exposure to rates. In that case, hedge ratio is determined by the DV01 of each contract.

My Z\$2c...

OK. Assuming you are hedging DV01. How could you get access to the DV01 values daily and could you share an example of your calculation for the hedge rations, I previously listed.

Thank you.

7. Martinghoul

Well, for Eurodollars (and other STIRs), 1 tick = 1 bp, which implies
DV01 = Contract Notn'l/4/10000
('cause it's 3M LIBOR).

For bond futures, the simple way is a basic duration calculation, given yield etc. The attached doc from Eurex might help you (start with slide 7). For all I know, the exchange might publish actual DV01/duration values, just like they do conversion factors, but I don't think they do now.

* Note that I said that the calc the Eurex doc talks about is a simplistic one. It does instantaneous DV01 and doesn't take into account the shifts in the probabilities of the bonds in the basket becoming the CTD. But this is a discussion for another day.

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8. dumb_mother

bloomberg publishes futures hedge ratios i don't have link but i'm sure you could find it there.

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