# Yield Beta

I understand from CFAI text the following on cross hedge & yield beta under Fixed Income (Reading 22):

Cross hedging requires dealing with two additional complications. The first complication is the relationship between the cheapest-to-deliver security and the futures contract ( Question: How is this complication addressed? ). The second is the relationship between the security to be hedged and the cheapest-to-deliver security ( Question: I think this is addressed by the regression to calculate yield beta? ).

Thank you.

1st one is by selecting the Hedge Ratio

Hedge ratio = Factor exposure of bond to be hedged / Factor exposure of futures contract

= Factor exposure of bond to be hedged / Factor exposure of CTD bond × Factor exposure of CTD bond / Factor exposure of futures contract

Hedge ratio = (DH * PH) / (DCTD * PCTD) × Conversion factor for the CTD bond

where DH = the duration of the bond to be hedged and PH = the price of the bond to be hedged. The product of the duration and the price is the dollar duration.

Thank you cpk123! <3