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WDIS Futures: Fourth Generation

Interest Rates Part 2

WDIS Futures: Fourth Generation

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Chris and Pete have their second discussion on Interest Rate Futures, most specifically the Eurodollar. They talk about the Dollar Value of a 1-Basis-Point change in yield, or DV01, of an underlying.

The larger the DV01, the greater the swings in price for a Treasury Note or Bond given any market-moving sentiment; also, DV01 increases as you go further out in duration. We use DV01 as a tool to hedge pairs trades along the Treasury and Eurodollar curve.

By comparing DV01s of the two legs in a pairs trade, a trader can derive a DV01-neutral spread. DV01-neutral spreads allow us to trade the curve without having a directional assumption.

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