changing nature of a DV01 and is called convexity. The more dramatic the convexity, the more a DV01 will vary as interest rates fluctuate.
Calculating the DV01 of a Treasury Security
There are two common ways to calculate the DV01 of a Treasury security. The first method involves calculating a Treasury security’s price sensitivity based on small incremental interest rate changes. The second method utilizes a Treasury security’s modified duration. Both methods are closely related to one another.
Method #1: Price Sensitivity
The simplest way to calculate a DV01 is by averaging the absolute price changes of a Treasury security for a one-basis point (bp) increase and decrease in yield-to-maturity. This calculation will measure how much a Treasury security’s price will change in response to a one-bp change in the security’s yield.
Let’s look at the current 10-year Treasury note that is cheapest-to-deliver into the March 2009 10-Year Treasury Note futures contract: the 5-1/8s of May 15, 2016. The last trade for this note was 108-19 (i.e., 108 and 19-32nds or 108.59375), which represents a yield-to-maturity of 3.79%. The cash price represented here is $108,593.75.
To determine the DV01 of this note, calculate the average absolute price change in dollars based upon a one-bp move up and down in yield. Exhibit 2 shows how you would do this for the 5-1/8s of May 15, 2016.
Absolute Price Change
3.78 (Down 1-bp)
3.80 (Up 1-bp)
Exhibit 2: 5-1/8s of May 2016
In this case, the average absolute change in dollar value of the note is $67.64 per one- bp change in yield-to-maturity.
Method #2: Modified Duration
Another way to calculate the DV01 of a Treasury security is to use the security’s modified duration. Modified duration is simply a measure of the weighted average maturity of a Treasury security’s cash flows. As yields fall, modified duration increases.