Hedging Real Exposures · Futures Trading Guide

A bond portfolio’s rate exposure is better described by sensitivity than by face value alone. A futures hedge must account for the contract’s own changing sensitivity.

Translate a yield move into cash

DV01 measures the approximate dollar change associated with a one basis point yield movement. For a conventional long fixed rate bond, rising yields normally reduce value. Duration helps estimate sensitivity, but the relationship is only local. Large moves require attention to convexity and changes in the yield curve rather than multiplying a single number indefinitely.

Calculate an illustrative hedge

Suppose a portfolio loses approximately $1,200 when its relevant yields rise one basis point. A selected fictional Treasury future has estimated DV01 of $80 per contract. Fifteen short contracts approximately offset a small parallel increase in yields. A ten basis point rise would imply a $12,000 portfolio loss and a similar hedge gain if all sensitivities held constant and the curve moved as assumed.

Understand what changes the futures sensitivity

A deliverable Treasury future references an eligible basket with conversion factors. The economically preferred delivery security and delivery options influence its price behaviour. Futures DV01 is not simply the face amount multiplied by a cash bond duration chosen at random. Use a documented current estimate and review it around market moves and delivery periods.

Test what the hedge does not cover

Different maturities can move by different amounts. Credit spreads, liquidity and portfolio composition can change independently of government yields. Stress steepening, flattening and a change in the preferred delivery security. Recalculate quantities as the portfolio and sensitivities evolve, and plan cash reserves for adverse daily settlement. A duration hedge reduces a specified risk instead of eliminating the possibility of loss.

Try it yourself

Estimated portfolio DV01 falls from $900 to $600. Each short hedge contract remains $50 of DV01. How does the simple hedge count change?

Show the worked answer

It falls from eighteen to twelve contracts. Rebalancing requires real trades and costs, and the estimates should be checked before acting.

Further reading

Educational material. Prices, margins and strategy examples are hypothetical unless explicitly identified as contract specifications. They are not trade recommendations. Futures losses can exceed deposited collateral. Product terms and eligibility vary by venue and jurisdiction.

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