Let’s look at the previously mentioned 5-1/8s of May 15, 2016 and the March 2009 10- Year Treasury Note futures contract (TYH9). The conversion factor for the 5-1/8s of May 15, 2016 for delivery into TYH9 is 0.9506. To convert the cash DV01 into a futures DV01, simply divide it by the conversion factor.
Futures DV01 = Cash DV01 / Conversion Factor
Futures DV01 = $67.64 / 0.9506 = $71.16
Now that we have the futures DV01 we can match it against the DV01 of any security we wish to hedge to determine the number of futures contracts we need to hedge the position.
A Word of Caution: If the futures contract is used to hedge a security it does not track (e.g., a corporate bond, swap, mortgage security, etc.), the underlying security and the hedge will not move in tandem due to basis risk and therefore must be monitored carefully. As interest rates change, the hedge will need to be adjusted to compensate for basis risk.
This information has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Although every attempt has been made to ensure the accuracy of the information within this brochure, CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this brochure are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience.
All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT and CME Group rules. Current rules should be consulted in all cases concerning contract specifications.