What is convexity in finance?
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garrik
Apprentice
Joined: 20 Dec 2007
Posts: 1
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 Posted: 05/20/08 - 10:28 Post subject: |
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| I was reading one book about finances. There was one chapter in which I saw some interesting things. The story was about relationship between bond prices and bond yields. I read that this subject is called convexity in finance. I want to know more about this appearance. Does anybody have any knowledge about convexity in finance? |
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joly
Apprentice
Joined: 02 Aug 2004
Posts: 1
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| Posted: 06/19/08 - 03:25 Post subject: |
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Hi there! You need to know a difference between positive and negative convexity. Positive convexity corresponds to curvature that opens overhead. Negative convexity corresponds to curvature that opens underneath. For example, a fixed-rate mortgage may lose worth as rates go down because of prepayments. Economic experts describe convexity in finance as the amount that a bond’s price sensitivity differs from what is implied by its duration.
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