hedge ratio CTD bond conversion factor questi

[BugEyedEarl]

Hey guys, I’ve a question regarding the ‘Fixed Income Portfolio Management Part II’ section in schweser.
On page 77 it takes the hedge ratio (exposure of bond to risk factor/exposure of futures to risk factor) and breaks it out into:
exposure of bond to risk factor/exposure of CTD to risk factor
multiplied by
exposure of CTD to risk factor/exposure of futures to risk factor.
It then states that the second term represents the conversion factor for the CTD bond. I don’t see how that term (exposure of CTD to risk factor/exposure of futures to risk factor) equals the conversion factor.
Can anyone shed some light?

 

[BN]

Assuming we are talking about exposure to interest rate (as risk factor), use dollar duration as the ‘exposure’.
Definition of CTD:
CTD price = futures price* conv factor. this translates to
DDf = DDctd/conv factor (see pg 75)
therefore, exposure of ctd/exposure of futures = conv factor
- bn