Change in the value of a position, in currency terms, for a one basis point move in rates, a hedging measure that is directly additive unlike duration.
Modified duration is a percentage and does not add across positions of different sizes without weighting. Basis point value is expressed in currency and adds directly, which makes it the working measure of trading floors and hedging teams. It equals approximately modified duration times market value times one ten thousandth. Its operational appeal lies in the simplicity of the hedging rule it yields: to neutralize a liability sensitivity, build a position whose basis point value is equal in amount and opposite in sign, with no need to reason in percentages or adjust for notional differences. Two precautions attend its use. It is local, so it ignores convexity and stops being reliable for large shocks. And it is computed on a parallel shift, which makes it blind to steepening risk, which is why it is broken into key rate sensitivities as soon as a portfolio spans several maturity segments.
Annuity liability of 6 billion euros, modified duration 12.4: basis point value of 7.44M EUR. The backing bond portfolio, 5.8 billion euros at modified duration 9.1, shows 5.28M EUR. The 2.16M EUR gap per basis point is the open position: a fifty basis point fall in rates costs roughly 108M EUR of own funds, and hedging it means adding exactly that much sensitivity.
DV01, PV01, BPV, valeur du point de base, sensibilité en euros