Answer: I and III

## Explanation DV01 (Dollar Value of 01) is a measure of interest rate risk that represents the price change in a bond for a 1 basis point change in yield. The key assumptions when using DV01 are: **I. Changes in the interest rates are small** - ✓ **CORRECT** DV01 is based on the concept of duration, which assumes small parallel shifts in the yield curve. For large interest rate changes, the linear approximation of DV01 becomes less accurate due to convexity effects. **II. The yield curve is flat** - ✗ **INCORRECT** DV01 does not require the yield curve to be flat. It can be calculated for any shape of the yield curve. **III. Changes to the yield curve are parallel** - ✓ **CORRECT** DV01 assumes that when interest rates change, they change by the same amount across all maturities (parallel shift). This is a fundamental assumption of duration-based measures. **IV. The yield curve is downward sloping** - ✗ **INCORRECT** The slope of the yield curve is not an assumption for DV01. DV01 can be used regardless of whether the yield curve is upward sloping, downward sloping, or flat. Therefore, the correct assumptions are **I and III**, which corresponds to option A.

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