Fixed Income
Class Notes
Chapter 5 – 11/3/11
Interest rate risk
of a security may be measured by how much its price changes as interest rates change.
One commonly used measure of price sensitivity assumes that all bond yields
shift in parallel, that is they
move up or down by the same number of basis points.
An interest rate factor
is any random variable that impacts interest rates in some way. This factor, known as
DV01, can be a yield, a spot rate, a forward rate or some other factor. DV01 is an acronym for dollar value of
an ’01 (i.e. .01%) and shows the change in the value of a fixed income security for a one basis point decline n
rates .
A negative sign defines DV01 to be positive if price increases when rates decline and negative
if price
decreases when rates decline.
DV01 is in fact positive most of the time.
DV01 should be measured using
points relatively close to the rate level in question.
A European call option
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 Spring '11
 Mimir
 Interest Rates

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