# Duration hedge ratio for interest rate futures

The formula for the duration hedge ratio for interest rate futures to protect against interest rate risk is:

H = (PP* DP)/ (PF * DF)

Where:

PP is the forward value the fixed-income portfolio being hedged (at
the maturity date of the hedge)

DP is the duration of the portfolio at the maturity date of the hedge

PF is the futures contract price

DF is the duration of the asset underlying the futures contract at the
maturity date of the contract

My question is why is the duration of the asset underlying the futures contract used in DF rather than the duration of the underlying asset plus the term to maturity for the futures contract?

Thank you very much

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you need to know how many futures contracts to buy / sell to get to your target duration.

for that only the duration of futures means anything

CP

Sorry I don’t really understand your answer…

My question was why is the duration of the asset (bond) underlying the futures contract used rather than the the duration of the asset (bond) underlying the futures contract plus the term to maturity of the futures

you are using the futures contract for the purpose of hedging. if you owned / bought / sold the underlying behind the futures contract - that affects the numerator (your portfolio). Your hedge (denominator) is only the futures contract.

CP

I still don’t think you understand my question/formula provided.

The numerator is for a bond portfolio (lets say a \$2 million porfolio of bonds that I currently own)

The denominator is for an interest rate futures hedging tool (lets say by X contracts of \$100,000 bond futures, where the futures contract is due for delivery in 8 months)

My question is -why in the denominator for the forumula is the duration of the \$100,000 underlying bond only rather than the duration of the \$100,000 underlying bond plus the 8 months?

NB