Sizing Swap Spread Positions by DV01

Summary

The document addresses how to size the swap and bond legs of a swap spread position. Its practical guidance is to match the legs by DV01 rather than by notional when the aim is to capture changes in the spread measured in basis points. Since instruments with equal notionals can have different interest rate sensitivities, notional matching alone may leave the position exposed to rate moves beyond the spread change.

The answer is brief and gives no worked example, sizing formula, or discussion of deliberately adding a duration bias. It also does not specify how to handle changes in sensitivity over time or other risks in the trade. The guidance is therefore a basic construction principle, not a complete position management method.

Key ideas

• A swap spread trade is generally sized to balance DV01 across its legs.
• DV01 matching aims to isolate spread changes measured in basis points.
• Equal notionals do not necessarily produce equal interest rate sensitivity.
• The document does not explain when or how to intentionally add a duration bias.

Tags

# Swap Spread Positions with Duration Bias


# Swap Spread Positions with Duration Bias












In practice, how are swap spread positions actually sized and constructed between the two legs? I would suppose the two legs are simply matched in notional terms.

However, in practice, do traders ever attempt to run some sort of swap spread position with a duration bias? For example, having a swap spread widener on with slightly more dv01 on the pay fixed swap?

## Answer by Edward Watson (score 3, accepted)

https://quant.stackexchange.com/a/60399

Yes, generally you want it dv01 hedged not notional hedged to capture the spread changes in basis points.

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