DV01

DV01 is a measure of interest rate risk expressed in money: how many roubles a particular position will gain or lose if the yield on the security moves by a basis point, the smallest step in which yield is measured. Unlike duration, which is expressed in years or as a percentage of price, DV01 answers the question of the amount, so the figures for different issues can be added together and compared without bringing them to a common par value.

What the figure is made of

The measure grows with three components: the sensitivity of price to yield, that is, modified duration; the full value of the position, which includes accrued coupon interest; and the size of the position itself. From this follows the consequence that is most often needed in practice: a short issue held in large size and a long issue held in small size can have almost the same DV01 — in money terms they carry the same risk, even though their durations differ markedly.

The second property is additivity. The DV01 of a portfolio equals the sum of the DV01s of the positions in it, whereas portfolio duration is calculated as a weighted average. This is exactly why money terms are convenient for sizing a hedge and for building portfolio immunisation: whether the money sensitivity of assets matches that of liabilities is checked by simple addition. The curvature that a linear estimate does not capture is described by a separate measure — bond convexity.

How it is calculated on exchange data

The calculation requires the modified duration and the full price of a specific issue, so it starts with securities whose quote rests on actual trades rather than on a single order:

The procedure is the same for any of them: take the modified duration of the issue, multiply it by the full value of the position and convert the result to a basis point. The resulting amount is the money with which the position answers for the smallest shift in the zero-coupon yield curve.

Where the measure is misread

The DV01 of an individual security silently assumes that one point of the curve has moved. That is never the case for a portfolio: the short end and the long end move differently, and the aggregate figure hides the structure of the risk — it is broken down through key rate durations.

For a floater, DV01 calculated to the maturity date is almost meaningless: the coupon is reset in line with RUSFAR or the key rate, and sensitivity is determined by the time to the nearest reset — this is covered in floater duration.

Finally, the measure captures interest rate risk only. A repricing caused by a deterioration in the issuer's credit quality passes it by: a widening of the Z-spread changes the price without touching the base curve, and credit risk is not part of DV01 at all. For a bond with a put option, a calculation to maturity overstates the figure — it has to be calculated to the nearest buyback date, as yield to put does.