Hedging Treasury Bond DV01 with a Eurodollar Futures Strip
Summary
The document describes a simple DV01 hedge for a five-year Treasury bond using a strip of three-month Eurodollar futures. First calculate the bond’s price sensitivity to a one-basis-point yield change. Then sum the DV01 of one contract at each maturity in the strip and scale the number of contracts so the strip’s total sensitivity offsets the bond’s exposure. The example uses a $10 million bond position with a stated DV01 of $4,500 and contracts with a stated $25 DV01 each, yielding a suggested equal quantity across the strip.
The responses caution that DV01 neutrality does not make the package riskless. Treasury bonds respond to the Treasury yield curve, while Eurodollar futures reflect the Libor curve; shared factors may coexist with basis risk. The calculation is therefore a rough parallel-risk hedge, and its usefulness depends on the trade’s purpose and curve behavior. The document does not provide a curve-based optimization procedure or address changes in hedge ratios over time.
Key ideas
- Calculate the bond’s DV01 and compare it with the aggregate DV01 of a futures strip.
- A strip can be scaled by a common contract count to offset the bond’s stated rate sensitivity.
- A bundle combines exposure to multiple contracts but does not remove the underlying curve risks.
- Treasury and Libor curves can move differently, leaving basis risk after a DV01 hedge.
- A DV01-neutral package should not be assumed to be riskless.
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Full text
# Hedging treasury bond with Eurodollar futures # Hedging treasury bond with Eurodollar futures I was reading Interest Rates Markets by Jha, and on p. 214, he describes hedging a 5 year treasury bond with a ED future strip, as described below. He says the best hedging quantity can be generated with Bloomberg, but I am curious to know more about how to calculate this. I have seen this done with approximations and with bundles (as described below as an approximation), but I would like to understand the ideal methodology. ## Answer by Attack68 (score 2) https://quant.stackexchange.com/a/43822 Take a 5Y bond, say buying \$10 million dollar notional and calculate the PV01 using you favourite method for calculating bond risks, e.g. some duration formula. Lets say this Pv01 is \$4,500 Now look at the ED strip. Each 3-month contract has a pv01 of \$25 by definition of the instrument. If you purchase 1 each of every contract for 5y then you will have purchased 20 different contracts and your dv01 will be \$25 x 20 = \$500. How many times do you need to do this to hedge your \$4,500 exposure? 9. So buy 9 contracts of each individual contract going out 5y on the strip. Note a bundle is usually just an instrument that simulates buying different contracts at once. ## Answer by Ezy (score 2) https://quant.stackexchange.com/a/43878 This book describes something that looks like DV01 hedging of the bond with eurodollar contracts. But the reality is that the underlying rates of the 2 kind of instruments are different. The bond depends on the treasury yield curve whereas the eurodollars depend on the Libor curve. These 2 curves share some common risk factors however there exist a basis between the 2. Therefore using simplistic hedge ratios based just on $DV01$ can be dangerous depending on what you are actually trading. For example if you were asked to provide a quote on a spread between the bond a a eurodollar strip that happens to be $DV01$ neutral you might work under the very wrong assumption that such a package is riskless.
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