How do you build a duration-neutral bond portfolio which is long convexity? can you give me an example?
$\begingroup$
$\endgroup$
Add a comment
|
2 Answers
$\begingroup$
$\endgroup$
2
I would say you can go
Long a bond with a low coupon
Short a bond with a higher coupon
For instance current for US Treasury circa 10Y
- 2% 15NOV26, BPV 8.7265, Convx 89.9624
- 1.5% 15AUG26, BPV 8.3071, Convx 87.9649
Buy 1,000,000 of the 1.5% and Sell 951,939 of the 2% would give you positive convexity and 0 duration. Of course more extreme coupon differential will give you a much better convexity exposure.
-
$\begingroup$ your example "long 1,000,000 @ 2% and short 1,006,056 @ 1.5% contradicts your statement "Long a bond with a low coupon and Short a bond with a higher coupon" $\endgroup$– NicholasCommented Nov 22, 2016 at 21:19
-
$\begingroup$ I had used modified duration instead of BPV when I skipped the spot consideration, that's why it didn't work, fixed it. $\endgroup$– LlianeCommented Nov 23, 2016 at 0:10
$\begingroup$
$\endgroup$
More typically this refers to a portfolio like:
Long 100MM 10yr bond with coupon 3% Short 180MM 5yr bond with coupon 3%
with the principal amounts chosen such that the BPVs in dollars are equal. This portfolio is long convexity.
The term "duration neutral" does not imply matched maturity.
