(a) Different Duration
For an Asset Allocation trade between Long Gilt futures and euro Swapnote® futures:
| Contract |
Nominal Size |
Sterling FX Spot Rate |
BPV |
Nominal Size £ |
| Long Gilt |
£100,000 |
|
0.071 |
£100,000.00 |
| 10yr euro Swapnote® |
€100,000 |
1.2572 |
0.083 |
£79,545 |
The nominal size must be first converted to a base currency (for example, Sterling).
|
Long Gilt Future
|
= |
Nominal value of Long Gilt x BPV of Long Gilt
|
|
|
|
10 Yr Swapnote
|
Nominal value of 10 Yr Swapnote x BPV value of 10 Yr Swapnote
|
|
7100.00
|
|
|
6602.24
|
Therefore the ratio will be 100 Long Gilt futures contracts for every 108 10yr Euro Swapnote® futures contracts.
(b) Same Duration
For an Asset Allocation trade between Sep 08 Short Sterling and Sep 08 Euribor® Futures:
| Contract |
Nominal Size Spot Rate |
Sterling FX £ |
Nominal Size |
| Sep 08 Sht Stg |
|
£500,000 |
£500,000.00 |
| Sep 08 Euribor® |
€1,000,000 |
1.6024 |
£624,063.90 |
The nominal size must be first converted to a base currency (in this example Sterling).
|
Sep 08 Short Sterling Futures
|
= |
Nominal value of Short Sterling
|
|
|
|
Sep 08 Euribor® Futures
|
Nominal value of Euribor®
|
|
500,000.00
|
|
|
795,450
|
Therefore the ratio will be eight Sep 08 Short Sterling futures contracts for every five Sep 08 Euribor® futures contracts.
(c) Options
For asset allocation trades between STIR Options, the hedge ratio should be determined based on the deltas of the two option contracts.
For example, for a trade consisting of a Euribor Option with a delta of 0.5 and a Euribor mid-curve option with a delta of 0.25, the ratio would be 1 Euribor Option for every 2 Euribor mid-curve Options.
An indicative calculator for hedge ratios for different contract combinations is available below.
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