Fixed Income: Hedging the DV01 (FRM T4-33)

The DV01 is dollar change in the position for a one basis point (1 bps) decline in the interest rate (typically, yield). The DV01 is expressed per $100 face amount; for example, $0.035 implies that when rates drop by one basis point, the bond will increase in value by $0.035 per $100 face amount. So, if the face amount is $10.0 million, then a 1 bps decline anticipates an increase in value of $10,000,000 * 0.035/100 = +$3,500.00. To hedge with instrument B (in this example, futures contracts), we use F(B) = F(A)*DV01(A)/DV01(B).

For other videos in our Financial Risk Manager (FRM) series, see one of the following playlists:

Texas Instruments BA II+ Calculator

Risk Foundations (FRM Topic 1)

Quantitative Analysis (FRM Topic 2)

Financial Markets and Products: Intro to Derivatives (FRM Topic 3, Hull Ch 1-7)

Financial Markets and Products: Option Trading Strategies (FRM Topic 3, Hull Ch 10-12)

FM&P: Intro to Derivatives: Exotic options (FRM Topic 3)

Valuation and RIsk Models (FRM Topic 4)

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[davidteixemolins]

Your videos are awesome, but I don't understand what you are doing from 12:49 (You are multiplying the facfe amount (in dolars) by its price (in dolars) giving a value that matematically is Dolar^2) I don't see any logic on that