CDS DV01=$5,000 => Notional=$10,000,000

v8625 · October 23rd, 2009, 7:41 pm

Is there a clearcut explanation behind this approximation? The assumption that a DV01 of $5,000 translates into a Notional of $10 million is widely used.

Ziggy · October 23rd, 2009, 8:42 pm

Simple: DV01 amount = Notional * modified-duration * 0.01%Modified duration needs to be risk adjusted for credit instruments. As most relatively low-risk 5 year instruments have a modified duration somewhere close to 5, your approximation works as a rough measure for that maturity.