DV01: What One Basis Point Is Worth
If rates move just 0.01%, how much does your swap or bond gain or lose? DV01 turns interest rate risk into money, and it tells you how much notional to use when hedging.
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Text version · Interest Rates & Swaps, lesson 8: “DV01: What One Basis Point Is Worth”
If rates move just 0.01%, how much does your swap or bond gain or lose? DV01 turns interest rate risk into money, and it tells you how much notional to use when hedging.
Basis points: the smallest unit of interest rates
In the rates world, people don't say “up 0.25%” but “up 25 basis points”. 1bp = 0.01%, 100bp = 1%, so nobody misreads a decimal point.
DV01: turning rate risk into dollars
DV01 is how much a position gains or loses for each 1bp move in rates. On a $10 million swap, it's about $1,900 for 2 years and about $8,100 for 10 years: the longer the maturity, the “heavier” each basis point.
Hedging: make both sides' DV01 equal
A long bond loses money when rates rise, and a payer swap makes money when rates rise. As long as both sides have the same DV01, gains and losses roughly cancel out however rates shift.
Key takeaways
- 1 basis point (bp) = 0.01%; DV01 = how much a position's value changes for a 1bp move in rates.
- A swap's DV01 ≈ notional × annuity factor × 0.01%. The bigger the notional and the longer the term, the bigger the DV01.
- Fixed payers make money when rates rise; fixed receivers and bond holders lose. P&L ≈ DV01 × the number of basis points moved.
- To hedge, match the DV01 on both sides: notional needed = DV01 of the position being hedged ÷ DV01 per unit of the hedging instrument.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Click “Example: $10 million · 5 years · +20bp”: what's the DV01? What are the estimated and exact P&L?
- Stay on the payer swap and drag the “Maturity” from 5 years to 10, then 30: what does DV01 become each time? Look at the maturity bars below.
- Switch to “Receiver swap” and drag the rate change to −50bp: is it a gain or a loss this time? Exactly opposite to the fixed payer?
- Click “How do you hedge a 10-year bond?”: what's this bond's DV01? How much notional of a 5-year payer swap does the “Hedge needed” card say you need?
Quiz and explanations
- 1. Rates rise from 4.00% to 4.25%. How many basis points is that?
- Answer: 25.0.25% ÷ 0.01% = 25 bp.
- 2. A $10 million, 5-year pay-fixed swap has a DV01 of about $4,450. Rates rise 20bp. Roughly what happens to the fixed payer?
- Answer: Gains $89,000.$4,450 × 20 = $89,000. Rising rates help the fixed payer.
- 3. Your bond holding has a DV01 of $8,000. A pay-fixed swap has a DV01 of about $4,000 per $10 million notional. Roughly how much notional do you need to hedge the interest rate risk?
- Answer: $20 million.$8,000 ÷ $4,000 = 2 units, so $20 million. The bond loses when rates rise and the pay-fixed swap gains, so they offset.
Terms in this lesson
- basis point (bp) (Basis Point (bp)): The smallest common unit for interest rates: 1 basis point = 0.01%, and 100 basis points = 1%.
- DV01: How much a position's value changes when rates move 1 basis point (0.01%), the Dollar Value of 01; the longer the maturity and the larger the principal, the bigger it is.
- notional principal (Notional): The amount used to calculate swap interest; it usually never changes hands.
- payer swap (Payer): The side of a swap that pays fixed and receives floating, which gains when rates rise.