In the secret sauce, I am reading Hedge ratio = DDp/DDctd * conversion factor for the CTD This is under the condition that yield spread between the bond being hedged and the CTD issue is assumed to be constanct, the yield beta must equal one. In which case that yield beta doesn’t equal to one?(what’s the implication for yield data not become to one) The formula changes to Hedge ratio = DDp/DDctd * conversion factor for the CTD * yield beta
What’s the cause for yield beta not equal to one? In theory, does that mean that future contract and bond portfolio yield change wouldn’t be idential, then why it is hedged that way?
It’s tackling 2 different concepts: - hedge ratio addresses the relationship between the price of bond being hedged (BBH) & that delivered in the futures (CTD) - yield beta is the relative change in the spread between the BBH and the CTD … that’s why the hedge ratio can assume Yield Beta = 1.
In second formula when yield beta doesn’t equal to one, does that also mean that the hedge is broken?