A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument.
One basis point is equivalent to 0.01% (1/100 of a percent) or 0.0001 in decimal form. If interest rates rose from 2.00% to 2.50%, it would be said that rates rose 50 basis points. In many cases, basis point refers to changes in short-term interest rates such as CME Term SOFR, which has replaced Eurodollars and its reference to LIBOR rates, but it is also important with longer term bond yields.
Basis Point Value (BPV), also known as DV01 (the dollar value of a one basis point move) represents the change in the value of an asset due to a 0.01% change in the yield.
BPV or DV01 calculations are used in many ways, but primarily to show the dollar amount of change for each increase or decrease in interest rates. If the value of a SOFR futures contract moves by 1 basis point (.01%), it would equate to a $25 move in the contract value. If SOFR futures moved 4 basis points or .04%, it would equate to a $100 move in the value of the contract.
Example
Assume the expected compounded SOFR rose from 4.00% to 4.05%. This would represent a .05% or 5 basis point rise in expected rates. But remember from the prior modules in this course that SOFR futures are priced using the IMM price index.
IMM price index = 100 – R
(R = the realized compounded daily SOFR during the contract reference period)
In the example above, the expected compounded SOFR was at 4.00%. Therefore, the IMM price index would be 100 – 4.00 = 96.00. Subsequently, the interest rate expectations rose to 4.05%. The IMM price index at that point would be 100 – 4.05 = 95.95.
As you can see, interest rate prices move inversely with interest rate yields. As the expected rates rose 5 basis points, the SOFR IMM price index declined from 96.00 to 95.95.
To find out how much that means in terms of dollar value, we have to convert basis point movement into dollar movement. This requires knowing the DV01.
The basis point value in SOFR futures is defined as $25. Therefore, a 5 basis point move equates to $125.00.
5 basis points x $25.00/basis point = $125.00.
Basis points and tick size in SOFR futures
While most SOFR contracts have a minimum allowable price fluctuation – or tick size – of one-half of one basis point (.005%), this is reduced as contracts near their expiration. Based on the defined BPV, the minimum tick would equate to $12.50. If the contract is within four months of the last day of trading, the minimum price fluctuation is set at one-quarter basis point or .0025%, equating to $6.25 per contract.
Nearby Expiring Contract: 1 Tick (.0025%) = $6.25
|
Tick movement |
Quote |
|---|---|
|
Starting price |
99.000 |
|
Increased 1 tick (.25 basis pts) |
99.0025 |
|
Increased 2 ticks (.50 basis pts) |
99.0050 |
|
Increased 3 ticks (.75 basis pts) |
99.0075 |
All Other Expiring Contracts: 1 Tick (.005%) = $12.50
|
Tick movement |
Quote |
|---|---|
|
Starting price |
99.000 |
|
Increased 1 tick (.5 basis pts) |
99.005 |
|
Increased 2 ticks (1 basis pts) |
99.010 |
|
Increased 3 ticks (1.5 basis pts) |
99.015 |
ACCREDITED COURSE
In case you didn’t know, the CFA Institute allows its members to self-determine and report continuing education credits earned from external sources. CFA Institute members are encouraged to self-document such credits in their online CE tracker. CME Institute offers a variety of courses, webinars, and white papers to support your professional education.
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