Treasury Futures Hedge Ratios: Conversion Factors and DV01

Summary

The note addresses why Treasury basis traders commonly express a bond-to-futures hedge using conversion factors rather than a DV01 ratio. Its central point is that the two approaches are equivalent when the futures contract’s DV01 is calculated from the cheapest-to-deliver bond’s DV01 divided by its conversion factor. Applying either measure therefore gives the same hedge quantity under that definition.

This is a concise conceptual clarification, not a worked hedge example. It does not discuss contract rounding, delivery options, changes in the cheapest-to-deliver bond, or residual risk from yield-curve movements. Those considerations can matter when implementing or maintaining a real futures hedge, so the stated equivalence should be read as a relationship between the basic hedge calculations.

Key ideas

• The futures DV01 is defined using the cheapest-to-deliver bond’s DV01 divided by its conversion factor.
• A conversion-factor-weighted hedge quantity and a DV01-based quantity are equivalent under that definition.
• The note explains the relationship but does not cover delivery-option or residual curve risk.

Tags

# Conversion Factor Weighted or Dv01 Weighted Treasury Futures Hedge


# Conversion Factor Weighted or Dv01 Weighted Treasury Futures Hedge












When trading the US Treasury Basis, why is a conversion factor weighted number of futures to your bonds the convention over DV01 weighted number of futures? why does one prefer the conversion factor weighting?

## Answer by nbbo2 (score 0)

https://quant.stackexchange.com/a/80490

It is the same thing because by definition the DV01 of the futures is = DV01-of-CTD / CF

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.