Pricing and Rate Risk · Swaps Trading Guide
DV01 turns a small rate change into a currency amount. Key rate risk reveals exposures that a single portfolio total can hide.
State the sign convention
DV01 describes value sensitivity to a one basis point rate change, but systems do not all display its sign the same way. Define whether your report gives the value change for an upward bump or a positive magnitude. One basis point is 0.01 percentage point. A fixed receiver generally loses value when relevant rates rise, all else equal.
Bump and revalue
Suppose a swap is worth $100,000 before a one basis point upward curve bump and $95,200 afterward. Under an upward bump convention its sensitivity is negative $4,800 per basis point. Rebuild or shift curves consistently and keep known fixings unchanged. The precise bump design is part of the result.
Look beyond the total
A portfolio can have a small parallel rate sensitivity but large opposing exposures at short and long maturities. Key rate buckets apply localized curve shocks to reveal this structure. Hedging only the total may leave substantial losses when the curve steepens, flattens or bends.
Use sensitivity as an approximation
Multiplying DV01 by a small rate move is a first estimate. Large moves change the sensitivity itself and can expose convexity, basis and collateral effects. Run full repricing for stress scenarios and keep different currencies separate until their values have been converted using explicit assumptions.
Try it yourself
A portfolio loses approximately $2,400 for each upward basis point. Estimate its value change for a 12 basis point rise, ignoring nonlinear effects.
Show the worked answer
The estimated loss is $28,800. This uses a constant sensitivity and a parallel move, so it is not a substitute for repricing the portfolio.
Further reading
Educational material, not a recommendation to transact. Numerical examples are hypothetical and simplify contract terms. Access, documentation, collateral and regulatory requirements depend on the product, jurisdiction and counterparties.
