Hi, question for the rates traders...You have a swapbook hedged with financial futures.(2 ,5 and 10 year note)You calculate the total DV01 of the swaps (ex. $5000) and the DV01 of the futures (ex. $-2500)(1)Is it correct to say that the portfolio gains $2500 if the curve shifts -1Bp?--> (Duration Long)the reason why I am asking is that I would assume that the futures are not valued on the same curve as the swaps are.

What you have done to your swap book by hedging with note futures is to replace outright swap rate risk with a basis risk (namely, swap spread risk). If the swap spread doesn't change as government rates change your book should be fairly well immunized. When the swap spread changes your book will experience P&L effects.Another implicit basis risk in such a hedge strategy is due to the imbedded options in the note futures. A change in the cheapest to deliver bond, for example, could materially affect the effectiveness of the hedges as well.

@ david...I understand..hedging with future create a swap spread position.Is it correct to add the dv01's of both swaps and futures?

It is common practice to add the dv01's but it is admittedly a bit sloppy to do so. One could redeem oneself, so to speak, by ensuring that one analyzes and reports what happens to the book if swap spreads change, all other things equal.The recent credit meltdown has left a lot of practitioners struggling with how to treat underlyings and especially counterparties with different perceived credit risk. The convenient fiction of a single swap rate for all counterparties may prove to be a thing of the past.

@ david....You mention a change in swapspread.Is the difference in DV01 swaps and DV01 futures the swap spreads DV01?

Yes, in your example you have 2500$ swap spd risk and 2500$ outright swaps risk

QuoteOriginally posted by: DavidJNIt is common practice to add the dv01's but it is admittedly a bit sloppy to do so. One could redeem oneself, so to speak, by ensuring that one analyzes and reports what happens to the book if swap spreads change, all other things equal.The recent credit meltdown has left a lot of practitioners struggling with how to treat underlyings and especially counterparties with different perceived credit risk. The convenient fiction of a single swap rate for all counterparties may prove to be a thing of the past.The wonder of credit charges and CSA/non-CSA discount curves... Fun times

QuoteOriginally posted by: PanangYes, in your example you have 2500$ swap spd risk and 2500$ outright swaps risk@ Panang...So,....1) swapspread risk is DV01 swap (+5000) -/- DV01 futures(-2500) = +25002)why is the outright swaps risk +2500. Is this not +5000?

your net risk is +2500 - thats your exposure should the curve move up and down and spreads are unchanged.

Think this way, swap PV is valued off the curve, and future is valued off the future's close price, which is decided by supply and demand. 1bps move of the curve does not necessary mean your future price implies 1bps move as well, that is where the basis risk come from.