Regression Hedge (Tuckman Ch. 6)

[BlackSwan]

Question regarding:
Study Notes R20.P1.T4.Tuckman_v3.1
Page 67

Greetings everyone. I hope this finds you all well in studying for the exam coming up. I was hoping someone could help me with a very simple concept of the regression hedge example found on page 67 with the section titled "Calculate the face value of an offsetting position needed to carry out a regression hedge."

My question really just deals with the sign of the answer and knowing if the hedge should be Long/Short.

We are solving for the F(R) with the given inputs in the box above. I took the formula from the section right above it for F(R) = -F(n) x DV01N/DV01R X Beta

So for the example I calculated F(R) as F(R) = -100 x (.055/.075) x 0.918 = -67.32 Million

I got a negative answer and if it was a test question I would've answered with a Short 67.32 Million for the hedge. However the example in the notes says Long the position. I'm just curious as to why the negative sign is dropped here. Any inputs on this would be greatly appreciated!

 

[IRENA BLAZINCIC]

Example on page 67 refers to problem that was set up at the buttom of page 65:

"If a trader goes short $100m of Treasury bonds, we can solve for how big a long position she needs
to enter into to make the position DV01 neutral."

The DV01 neutral hedge calculated on page 65 was $73,33mil.

Now, on page 67 you are asked to calculate reggresion hedge for the same position: short $100m of Treasury bonds.

F(R) = -(-100) x (.055/.075) x 0.918 = +67.32 Million

 

[BlackSwan]

Ok great that makes sense now. I figured I was misreading the inputs in some way. Thanks for your help!

 

[David Harper CFA FRM]

Thank you @irenab! awesome