How to compute interest rate futures spread ratio?

External question — Quantitative Finance Stack Exchange Author: Sam Hayen Original post: https://quant.stackexchange.com/questions/4101 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I am confused on how to compute the spread ratio. For example, this is example I came across with my broker - Consider 2 contracts Bobl and Euribor. The DV01 of Bobl i 44.8 and Euribor is 25. To equalize DV01, we need 44.8/25=1.792 contracts of Euribor for every 1 contract of Bobl. However, tick sizes are different. 1 Bobl Tick is 10 Euros and similar Euribor tick is 25. So the ratio will be for 1 Bobl we need 1.79*(25/10) = 4.475 contracts of Euribor. I understand DV01 sensitivity to compute the hedge ratio. However, I don't understand how is he using tick sizes. If he related tick sizes to basis points, it would have made more sense to me. Does someone understand this?

External answer — Quantitative Finance Stack Exchange Author: RRG Original post: https://quant.stackexchange.com/a/9657 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Minimum price movement for Bobl is 1 basis point with a value of €10. Minimum price movement for Euribor is 0.5 basis point with a value of €12.50. This is usually called a half-tick. So a full-tick would have the value €25. With these definitions, a tick is a basis point move for both the Bobl and the Euribor.

External answer — Quantitative Finance Stack Exchange Author: Attack68 Original post: https://quant.stackexchange.com/a/35964 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Actually the classical definition of a tick is the minimum price movement of a future (set by the exchange). This is often misrepresented semantically as most instruments have a genuine tick size of 0.01 (e.g. Bobl, Bund or Short Sterling contracts) but some do not (e.g. Euribor has 0.005 tick, Schatz has 0.005 and Buxl has 0.02). So some finance practitioners say a tick when they actually mean a cent, which is a 0.01 price deviation. Be aware of that. Secondly with respect to your question; 1) The notional on a Bobl contract specification means that one cent (0.01) is worth 10EUR. If Bobl has a DV01 of 44.8EUR this is a movement of 4.48 cents or 4.48 ticks for each bp. 2) The notional on a Euriobor contract spec means one cent is worth 25EUR. If one contract has a DV01 of 25EUR this is a movement of 1.0 cents or 2 ticks for each bp. To get the hedge ratio of number of contracts divide 100 Bobls of 4480 DV01 by 25 to get 179 Euribor contracts. Of course you will have a superior hedge if you trade all different contracts (to a total of 179) rather than a single contract (e.g. Sep 18). If you wanted to approximate an asset swap then you would have to trade something slightly different to a linear pro-rata of different contracts, although with current yield levels it will probably be minimally different.