It stands for dollar value of one basis point; DV01 captures the effect of a one-basis movement in interest rates on the value of an instrument or a portfolio. DV01 is defined as:
DV01=−ΔP/ Δr
Where:
Δr is the size of a parallel shift in the interest rate term structure, expressed in basis points, while ΔP is the change in the value of the position in question.
For a long position in a fixed-income instrument, the DV01 tends to be positive due to the existence of a negative correlation between the instrument’s price and the change in interest rate.
DV01 comes in multiple forms including:
- Yield-based DV01: the change in an instrument’s price from a one-basis point increase in the yield of the instrument.
- DVDZ or DPDZ: the change in an instrument’s price from a one-point increase in all spot rates.
- DVDF or DPDF: the change in an instrument’s price from a one-basis point increase in the forward rate.
