DV01 question in Rates S&T
Hi all, recently joined a bank working in FICC Sales and Trading Tech role. I’m currently working on a G10 Rates Sales project. FICC S&T is new to me as I spent a lot of time in the IB side of banking.
I understand the concept of DV01 but can someone please explain to me why Sales & Trading want to analyse trade data in DV01 terms. What does DV01 tell them when they look at a particular trade?
All I see is DV01 as a figure, but don’t understand how or why it’s captured/calculated for every trade.
Thanks
Are you asking why risk is viewed in DV01 terms? Because ultimately what matters is P&L, so you want all of your "risk" to be in viewed in relation to your P&L. If a trade is 10k DV01 vs. 100k DV01, it tells me all I need to know about the relative duration risk of the trade to each other. From that I know if a trade moves for me 5 bps, I can be up 50k or up 500k.
Would I be correct in saying that the DV01 in your example would only be if this trade was kept on the books?
If it moved 5bps against you, then you could be down 50k or 500k too?
Wouldn’t the job of the trader be to exit this position or sell it on to manage the risk/lock in the profit, or can traders keep the position depending on how they view the market?
I can see why the above is relevant to traders but why would someone in Sales be so interested in DV01 too?
Thanks
Matters to sales because they make money by bringing on these big trades. If a sales brings a 10k 01 trade, there’s not much risk/room for the trader to make money off it, whereas a 100k 01 trade has much more risk/much more room to make money. Then, sales will basically take a cut of the trade, typically based on how big the trade was ie the DV01.
DV01 is the dollar value of one basis point move in rates. Simply, this is just a means of quantifying risk in the fixed income universe. If I am long 100mm in bonds with X DV01, I would need to put on hedges with the same DV01 to be neutral.
If I am net long 1mm DV01 and rates sell off 1bp then I would be down 1mm. If you are putting on, and unwinding positions, your DV01 would constantly be changing.
Wouldn't you be up 1mm if rates sell off (i.e. prices fall, rates rise)? (and down 1mm if rates rally)
Thanks
By convention - long/short rates refers to being long short/short in price space, not yield space. If you're long rates, you want yields to go down
DV01 is the dollar value of a bps put plain and simple. I.e. if rates go up 1 bps your 01 in ten years for a bullet is worth an eighth for example. It’s a useful tool in assessing downside for you book, but intuitively your DV01 grows as Mod dur increases via extension or the bond is more convex
Ok I understand why that’s important to trading, but why would someone in Rate Sales be interested in DV01?
It's a risk business. DV01 both determines the profit/loss of a trade & acts as the qualifier for how everything is framed. Like USD is in a sense. Very impt for sales as their allocation of a trade is tied to it. Never forget that it's both sales and tradings ultimate job to manage risk first and foremost.
I work on a trading floor and here's how DV01 is used for rates s&t:
- Sales: If you're a salesperson, you'll have an account to manage and your equivalent to a trader's P&L is sales credit. It depends on the firm, but often sales credit is calculated by the DV01 of the trade multiplied by the average upfront P&L of the trade. Also, trades are sized in DV01 terms so you'll need to know how to go between DV01 and the notional of a trade when a client comes to you with either one of those requests.
- Trading: If you're a rates trader, you're going to learn how to convert between cents and bps when you price a trade. For example, if someone asks you how many cents is 3 bps worth upfront, you'll need to calculate DV01 of the trade multiplied by 3 bps to get the upfront P&L from that trade in cents (this blogpost will be helpful: https://fermatslastspreadsheet.com/2011/12/29/speaking-with-a-rates-tra…). Also, bond risks are all calculated in DV01 terms. When a rates trader is delta or gamma hedging (read: duration and convexity), they're hedging in DV01 terms.
There are probably a lot more reasons why everything is in DV01 but when it boils down to it, for fixed income, DV01 is used to price the risk and position of every trade which is obviously important for any salesperson or trader. Hope that helps.
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