Is it a good method to set DV01 Limit for the portfolio (Bond, Structured, Swap, EMTN)? If so, how to use it? Can we use DV01 limit to control our portfolio size?

this doesn't sound like a great idea. DV01 is not the same as VAR... for example, DV01 on a AA rated credit is not nearly as risky as the same DV01 on a BB rated credit. If you were limited only by DV01, you'd maximize your risk by trading short-dated, but very low rated credits.

let's say we have 1,000 DV01 Limit, we can have more limit if trading short-dated than long-dated.......is it the best way to control the risk and the size of the portfolio?

Limiting VAR is more complete(?)... DV01 (sensitivity) is just one part of the VAR equation. Volatility is another important factor of risk.Take these to together and you have VAR. You can have a very sensitive asset (asset 1) but in a very non-volatile environment and a non-sensitive asset (asset 2) in a very volatile environment. It is possible that you will have greater risk in asset 2 and your DV01 limit system gives you the liberty to load up on them. But VAR limiting is more difficult to monitor and do on-the-fly calculations. So people would look for shortcuts.Some even argue that volatility on the other hand is difficult to estimate and not constant so DV01 is the more consistent measure. Stress situations do show that higher DV01 asset loses more anyway. So it does make sense to limit positions using DV01. This can be suggested to firms with simple risk profile, asset classes with similar vol characteristics (homogenous), and lack sophisticated risk systems.As a market risk manager I would suggest that limiting though VAR and Stress Test results would be better but more difficult to implement.

Let's say, if i have 1,000 DV01 limit, and then I invest $20million, so my DV01 limit should be reduced to below 1,000 level, does it make sense?

That correct. That will bring down your free DV01 limit to less than 1,000.This mean you can still add to your position as long as the total DV01 of your portfolio is 1,000 or less.

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i still don't get the full pictureif the DV01 limit is 1,000, does it mean the portfolio will be changed by $1,000 per 1 basis point?

If the DV01 of your portfolio is $1,000. You are correct in saying that your portfoilo will change by $1,000 for each 1 bp shift.If you set up a DV01 limit of $1,000. This means that your portfolio (whatever the notional amount is) should not have a DV01 (sensitivity) of $1,000.You can have a sensitive portfolio of long-dated bonds but you have to lessen the face value to comply with our DV01 limit.On the other hand, you can also have a non-sensitive portoflio of short-dated bonds where you can increase your position (more than long-dated bonds) and not breach your $1,000 limit. The face value (position size) of these two portoflios can be very different but the DV01 is the same at $1,000 if maximized.

So if i buy 10mio note, the DV01 limit is 1,000, and available limit will be reduced, but that DV01 for that 10mio is XXX, can that DV01 be changed due to market conditions? or constant?

Simply put, you calculate the duration of the 10mio bond and derive DV01 from that. Hopefully it won't be more than $1,000.DV01 is not constant, it graudually changes. Factors that goes into the calculation are:1) whether the bond is at par / premium / or discount2) time to maturity

so if i buy something, the DV01 at inception will be different from DV01 of a few months later?

and if you hold it for years your DV01 significantly decreases... as sensitivity decreases as you near maturity.you have to recalculate regularly

FWIW a quick and dirty rule of thumb for DV01 estimation on par zero coupon instruments is Notional * Time / 100 / 100. So your ten million notional you would be stuck with 1-year duration if your limit were a dv01 of 1000.Your traders could of course game this by going short and long in different buckets. For example, say you went long 1 billion 1-year debt and assume this had a dv01 of +100,000 (using the convention that -1bp shifts are employed, meaning your dv01 is the same sign as your position). Further, you go short 500 million 2-year debt and assume this has a dv01 of -100,000. You have net dv01 of 0 so you'd be onside from a limits perspective. But there exists a large "steepener" position. You want rates to go down in the one year bucket (because you're long there) and up in the 2 year bucket (because you're short there). OTOH, if rate differentials "flatten" by 1bp in the 1-2yr yields, you lose 100,000 per bp. To properly compute what the actual dv01 is, don't use the quick and dirty method. Look at bootstrapping a curve and compute the sensitivities there.

Even bootstrapping you can have zero DV01 for parallel shifts but rather a large absolute DV01 if you absolute sum across time buckets. e.g. pay 20m 5 year, receive 10m 10year.Most people would think summing the absolute DV01s was rather harsh as practically 80%-90% of the moves in a yield curve is a parallel shift. If you want to more sophisticated you need to look at some sort of PCA approach and correlation of moves across time buckets.In terms of DV01 being constant - no it isn't. The time factor has been mentioned and as noted it is pretty much a linear function of time. Most products however also exhibit convexity so moves in interest rates also cause changes in DV01.Assuming you know the formula for determining a discount value for a given rate, the first derivative with respect to rate is DV01 (after scaling for notional etc.). The second with respect to rate is convexity and the derivative of DV01 wrt time will tell you the effect of reducing time to maturity.Practically, at least in some banks limits are imposed based on net DV01. Looking only at this the trader could have a large short dated position or a smaller long dated position or a steepener/flattener of whatever size he is comfortable with. This is not however his only limit just one of many. Also depends which risks you net, I have for instance seen massive positions on swaps vs bonds where net DV01 is almost zero.