DV01

DV01 restates duration in a form you can size a trade with. Rather than saying a bond falls about 8% for a 100 basis point rise, it says a specific position loses a specific number of euros for a one basis point rise, which is directly comparable across instruments of different sizes and prices.

That comparability is the point, because a hedge is sized by matching sensitivities and not notionals. Divide the DV01 of the position by the DV01 of one hedging contract and the result is how many contracts are needed. Government bond futures are the usual instrument, Bund or OAT futures in euros and gilt futures in sterling, and the contract's own DV01 has to be derived from the bond that is cheapest to deliver into it.

The limitation is what the hedge leaves behind. A government bond future carries no credit exposure at all, so a DV01 hedge neutralises interest rate risk and leaves credit spread risk entirely open. In a credit selloff, where rates often rally while spreads widen, both legs can lose at once. Hedging spread needs a credit default swap or a credit index.

The ratio also drifts. A position's DV01 changes as time passes and as yields move, which is convexity, and the futures contract's sensitivity shifts when the cheapest to deliver bond changes, so a hedge set correctly today needs rebalancing.