The number of futures traded should be derived from the hedge ratio between the futures contract and the underlying instrument. The table below outlines the appropriate hedge ratio methods for basis trades involving different cash legs. The different methods will give approximately equal results whilst affording the basis trader a degree of flexibility.

• The sensitivity of a cash bond is defined as the price value (measured in basis points) of a one basis point shift in the yield to maturity of the bond. This is termed as the Basis Point Value - ‘BPV’ of the bond.
• The sensitivity of an OTC swap is defined as the change in the replacement/liquidation value of the swap (measured in basis points) given a one basis point parallel shift in either the par swap curve or the effective yield of the swap.
• The sensitivity of a repo is defined as the change in the amount of repo interest to be paid given a one basis point movement in the repo rate.
• The sensitivity of an OTC option or OTC option strategy is defined as the delta of the option or net delta of the options strategy.

If the cash leg of the basis trade is denominated in a currency different to that of the NYSE Liffe contract, its nominal/face value must first be converted into the currency of the Liffe market contract, using the appropriate spot currency exchange rate taken at the time of the trade.

where:

For basis trades involving STIR futures contracts:

1. where the underlying instrument is a non-IMM swap or a bond, an interpolated hedge may be required. Accordingly, the maturity of the relevant futures contracts involved in the basis trade may exceed the expiry date of the OTC instrument by one STIR futures delivery month.
2. there will be no restriction as to the number of STIR futures contracts making up each expiry month, although, in aggregate the number of STIR futures contracts should not exceed those calculated in accordance with the stated hedge ratio.

The hedge ratio of the transaction should equate the traded value of the basket of stocks and the underlying value of the futures contracts traded. The number of futures should therefore be found as: