On page 28 of the market risk notes, the formula for duration based hedging strategy was N* = PD / FD

How do you know if you have to go long or short the number of contracts provided by the formula?

The example on page 28 says the result of 122 futures contracts should be shorted.

Dennis,

This is from Hull, and it assumes the underlying is LONG bond, so the hedge must (always) be short the T-bond futures contract (i.e., rates go up, long bond loses, but offset by short futures contract)

The underlying could be a short (-P) in which case the Number of contracts would be negative, and that would signify a need to go long the futures. So, +N = short and -N = long, in this context. But, rather the +/-, I’d recommend thinking about the dynamic of short T-bond futures contract.

David