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Estimating Swap DV01 and CS01 from Notional and Maturity

Article Quant Q&A · Author: Diuoo
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Summary

The document asks whether notional and maturity alone can support a quick mental estimate of interest rate swap DV01 and credit default swap CS01, and whether being at or away from fair value matters. The response gives a rough PV01 estimate based on notional, a one-basis-point move, and maturity, noting that the shortcut may be closer for low-rate currencies. It explains that PV01, the discounted value of a basis point, is close to market-value DV01 for a swap at fair value.

For a swap with a substantial positive or negative net present value, the response says DV01 also reflects changes in the discounting of that value, so it can differ from PV01. The answer does not actually give a CS01 estimate or a method for estimating it. Its shortcut omits details such as payment schedule, curve shape, discounting, and instrument structure, so it should be treated as a rough intuition rather than a dependable valuation calculation.

Key ideas

  • Notional and maturity can provide a rough starting point for estimating swap PV01.
  • PV01 is close to DV01 when a swap is at fair value because its net present value is near zero.
  • A swap away from fair value can have additional sensitivity from discounting its nonzero value.
  • The response does not provide a CS01 calculation.
  • A maturity-based shortcut omits curve and cash-flow details that affect actual sensitivities.

Tags

Fixed incomeDerivatives pricingRisk management
Full text
# Quick rule of thumb for DV01 and CS01 calculations


# Quick rule of thumb for DV01 and CS01 calculations












If someone tells me there is a IRS and a CDS both with 10M notional and 5y maturity, is there a reliable quick calculation that I could easily do mentally to approximately calculate their sensitivities (DV01 and CS01)? Does it make a difference if the 2 swaps are at-the-money or deep in/out of the money?

Intuitively I understand the sensitivities are linked to the maturities but how can I use the information I have to quickly give a sensitivity for these products?

## Answer by David Duarte (score 2)

https://quant.stackexchange.com/a/65710

As a ball park figure, your value would be around 5k (=10M x 0.01% x 5). If your swap in in EUR or JPY that have very low rates, you won't be too far off.

However, this will give you the PV01, i.e., the discounted value of 1 bps, which is the same (or very very close) as the sensitivity of the market value to a change in 1bp (DV01) if the swap is at fair value.

If the swap is deep in/out of the money the DV01 with not be equivalent to the discounted value of 1 bps because you would also have the sensitivity of discounting an NPV that is not zero.

Hope this helps...

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.