CR01/DV01

Discussion in 'P2.T5. Market Risk (25%)' started by maggii, Feb 8, 2012.

  1. maggii

    maggii New Member

    Hi,
    I am a newbie to the forum..
    Have to get answer for two questions and thought someone here may be able to assist:
    1) Which portfolio would have higher DVO1 - the one paying fixed rate coupon or floating rate one?
    2) Is CR01 same as DV01 and if no what is the main difference
    Any help will be much appreciated!
    Maggie
  2. Hi maggii,

    Welcome!

    1. A key relationship is DV01 = (-slope)/10,000 = dollar duration / 10,000 = ModifiedDuration*Price/10,000; in this way, conditional on an equivalent price, the DV01 goes up and down with modified duration. As a floating rate note has duration near to zero (time to next coupon) and a fixed coupon has duration somewhat nearer to its maturity, the fixed rate coupon will have a higher DV01 just as it has higher duration. However, you can see by the ratio, DV01 = D*P/10,000, that we can imagine a fixed portfolio with duration (eg) of 5 years and value of $1 mm, that has a lower DV01 than a floating portfolio with duration of 3 months and value of $40 million. The DV01 is estimated *dollar change* per one basis point, so portfolio size is a big driver.

    2. I am not familiar with CR01. FRM (following Tuckman) refers to KR01 (key rat 01). KR01 has similar meaning to DV01, both are the (linear) estimate of dollar change, but while DV01 assumes a parallel shift (in a flat yield to maturity), the KR01 is typically smaller because it assumes only a "shock" to a key rate (e.g., 2 year rate) and its neighboring rates. I hope that helps, thanks,

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