A hedge ratio that is constructed when interest rate futures contracts are used to hedge positions in an interest-dependent asset such as a bond portfolio or a money market security. This ratio can be used to make the duration of the entire position zero. The number of futures contracts (N*) needed to hedge against a given change in yield (Δy) is:

N* = (P. D_P)/ (F_C. D_F)

Where:

P   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

FC is the futures contract price (futures price)

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

This ratio is also known as the price sensitivity hedge ratio.

For a numerical example, see: duration-based hedge ratio- an example.