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FRM Part I · FRM Exam Part I · Applying Duration, Convexity, and DV01

A desk is long Bond A with a DV01 of $12,000 and short Bond B with a DV01 of $7,500. Assuming a small parallel upward shift of 10 basis points in all yields, what is the approximate effect on the combined position?

A loss of about $45,000. The short position offsets part of the long, giving a net DV01 of $4,500. Yields rising by 10 basis points reduce the value of a net long position by 10 times that amount.

  1. AA loss of about $45,000Correct
  2. BA gain of about $45,000
  3. CA loss of about $195,000
  4. DA loss of about $4,500

Explanation

The net DV01 is 12,000 − 7,500 = $4,500 long. A 10 bp rise in yields causes a loss of 4,500 × 10 = $45,000. A gain has the wrong sign. The $195,000 option adds the DV01s instead of netting the short position. The $4,500 option reflects a 1 bp move only.

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