A Guide to Duration, DV01, and Yield Curve Risk Transformations

29 Pages Posted: 1 Jan 2011 Last revised: 23 Jan 2011

See all articles by Thomas Coleman

Thomas Coleman

University of Chicago - Harris School of Public Policy; Close Mountain Advisors LLC

Date Written: January 15, 2011

Abstract

Duration and DV01 (dollar duration) measure price sensitivity and provide the basic risk measure for bonds, swaps, and other fixed income instruments. When valuing instruments off a yield curve, duration and DV01 naturally extend to a vector of partial DV01s or durations (key rate durations) and these are widely used in the finance industry. But partial DV01s or durations can be measured with respect to different rates: forwards, par rates, zero yields, or others. This paper reviews the concepts of partial DV01 and duration and then discusses a simple method for transforming partial DV01s between different rate bases and provides examples. The benefit of this transformation method is that it only requires calculating the risk of a small set of alternate instrument and does not require re-calculating the original portfolio risk. (This paper is also available in an interactive version with enhanced digital content - see references.)

Keywords: DV01, Duration, Key Rate Duration, Interest Rate Risk, Yield Curve Risk, Dollar Duration, Modified Duration, Partial DV01

JEL Classification: G10, G12, E43

Suggested Citation

Coleman, Thomas, A Guide to Duration, DV01, and Yield Curve Risk Transformations (January 15, 2011). Available at SSRN: https://ssrn.com/abstract=1733227 or http://dx.doi.org/10.2139/ssrn.1733227

Thomas Coleman (Contact Author)

University of Chicago - Harris School of Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

Close Mountain Advisors LLC ( email )

19 Davenport Ave.
Unit B
Greenwich, CT 06830
United States

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