CDS duration measures how much the market value of a credit default swap changes when the reference entity’s credit spread moves by a small amount. A contract with a duration of 5 gains or loses roughly 5% of its notional for every 1% shift in the spread. In practice, traders don’t quote duration as a single number; they work with risky PV01 and its dollar counterpart, DV01 (also called CS01), which together describe how a CDS position responds to credit risk.
CDS Duration Is About Credit, Not Interest Rates
Bond duration, particularly modified duration, tells you how much a bond’s price moves when the risk-free rate changes. If Treasury yields rise 50 basis points, modified duration estimates the price drop. CDS duration ignores interest rates almost entirely. It captures how the contract’s mark-to-market value responds to changes in the credit spread of the reference entity, whether that’s a corporation, a sovereign, or a structured product.
The distinction matters because the two risk factors often move independently. A company’s spread can widen sharply while Treasuries stay flat, or even rally. A portfolio holding both bonds and CDS needs separate duration measures for each risk factor, or the hedge ratios come out wrong.
Risky PV01: The Building Block
Risky PV01, sometimes written RPV01, is the present value of receiving one basis point per year over the remaining life of the CDS, discounted by both the risk-free rate and the probability that the reference entity survives to make each payment. That survival-weighted discounting is what makes it “risky” rather than a plain annuity calculation.
A five-year CDS with a risky PV01 of 4.3 means a stream of one-basis-point annual payments, adjusted for the chance of default before each payment date, is worth 4.3 basis points of notional today. The higher the default probability, the lower the risky PV01, because there’s a greater chance the premium stream gets cut short by a credit event.
Risky PV01 also anchors the pricing of the premium leg. The annual spread a protection buyer pays is set so that the present value of those spread payments, weighted by survival probability, equals the present value of the expected default payout. Risky PV01 is the multiplier that turns the spread into a dollar figure for the premium leg.
DV01 and CS01: The Number Traders Actually Use
The two terms are interchangeable in the CDS market. DV01 answers a simple question: if the credit spread moves by one basis point, how many dollars does the position gain or lose?
The calculation is straightforward. Multiply the risky PV01 by the notional, then scale to one basis point. A $10 million notional CDS with a risky PV01 of 4.3 has a DV01 of roughly $4,300. If the spread widens by one basis point, the protection seller loses about $4,300 in mark-to-market value and the protection buyer gains the same amount.
That one-basis-point shock is the standard unit for comparing risk across contracts. A desk might be short protection on Company A with a DV01 of $15,000 and long protection on Company B with a DV01 of $12,000. The net DV01 of $3,000 tells the trader how exposed the book is to a broad one-basis-point widening across both names.
What Drives DV01 Higher or Lower
Two factors dominate. The first is maturity. A ten-year CDS has roughly twice the DV01 of a five-year CDS on the same name, because the premium stream is longer and each basis point’s survival-weighted present value spreads across more years. Longer-dated contracts carry significantly more spread risk per unit of notional.
The second is the credit quality of the reference entity. A name trading at very wide spreads, say 500 basis points or more, implies a high default probability. That elevated probability reduces risky PV01, because fewer premium payments are expected to actually occur. Counterintuitively, very distressed names have lower DV01 per unit of notional than investment-grade names of the same maturity. The spread is high, but the duration is short.
Sensitivity Along the Credit Curve
The DV01 described above assumes the whole credit curve shifts in parallel, with every maturity point moving by the same basis point. Real spread moves are rarely that uniform. The five-year point might widen while the ten-year stays flat, or the short end might invert relative to the long end.
Risk systems break the curve into individual tenor points and calculate a separate DV01 at each one. This is analogous to key rate duration in the bond world. A portfolio that looks flat on aggregate DV01 can still carry substantial risk if it’s long the short end and short the long end of the same issuer’s curve.
Where the Linear Estimate Breaks Down
DV01 is a linear approximation. It treats the relationship between spread changes and value changes as a straight line. For small moves of a few basis points, the approximation is excellent. For larger moves, it starts to miss.
The actual price-spread relationship is curved. When spreads widen significantly, the protection buyer gains more than DV01 alone would predict. When spreads tighten sharply, the buyer loses less than the linear estimate suggests. This asymmetry is convexity, and it works in the protection buyer’s favor. A trader long protection on a name that blows out by 200 basis points will find more profit in the position than a simple “DV01 times 200” calculation would have indicated.
Convexity is a second-order effect, material during large credit events or broad market dislocations. For routine daily risk management, DV01 does the work. Ignoring convexity when stress-testing against large spread shocks understates gains on long protection and overstates gains on short protection.
How CDS Duration Gets Used
The most common application is hedging. A bank holding corporate bonds can buy CDS protection with a notional sized so that the DV01 of the CDS offsets the credit spread duration of the bond holdings. If the bond portfolio has a credit DV01 of $22,000, the hedge needs to deliver roughly $22,000 in DV01 on the other side. The trader picks the notional and maturity combination that hits the target.
Risk aggregation is another core use. A credit desk running positions across dozens of reference entities needs a single number for total spread exposure. Summing DV01 across all positions gives that figure. Risk limits are typically set in DV01 terms: a desk might have a limit of $500,000 net DV01, meaning the portfolio’s value cannot move by more than $500,000 for a one-basis-point parallel shift.
Duration also feeds P&L attribution. When a book makes or loses money overnight, the risk system decomposes the result into components: how much came from spread changes (DV01 times the actual spread move), how much from the passage of time, and how much from curve reshaping. Without an accurate DV01, that decomposition doesn’t work, and the trader cannot tell whether today’s profit came from a deliberate view or an unintended position the book happened to be carrying.
Contract Conventions That Shape Duration Over Time
CDS contracts trade with standardized coupons, typically 100 basis points for investment-grade names and 500 for high-yield. When the market spread differs from the fixed coupon, the difference settles as an upfront payment at trade inception. That upfront exchange does not change DV01, because DV01 measures ongoing sensitivity to spread movements rather than the one-time settlement amount.
Premium payments are quarterly, and standard maturities roll on fixed cycle dates set by ISDA. Because the conventions are uniform across the market, DV01 is comparable between counterparties and trading venues.
As the contract approaches maturity, its risky PV01 declines naturally, because fewer premium payments remain. A five-year CDS bought today will behave like a four-year CDS a year from now, with a correspondingly lower DV01. Traders who want to hold a constant level of spread exposure roll their positions into new on-the-run contracts periodically, which resets the duration back to the full term.