Hello. While the topic of byuing and selling volatility seems fairly streight forward: expect increase => buy; expect decrease => sell. I get a bit confused with convexity:
If you expect convexity of the yield curve to increase (i.e. long and short term interest rates go up, mid-term go down), do you buy barbel or sell? To me it makes sence to sell barbel as the long and short term bonds are going to decrease in value…(?).
If you sell barbel how is it called in terms of convexity buy or sell…(?)
Could anyone please explain - it looks like this should be an easy subject and I am probably missing something out…(?)
I would suggest with in the context of your CFA studies you don’t use convexity when referring to yield curve shape changes as this will just cause confusion versus convexity in the context of the bond price/yield relationship.
What you are referring to the syllabus talks about butterfly strategy.
For example :
Short and Long (2y and 10y) - barbelln(wings)
Medium (5yr) - bullet (body)
Positive butterfly
Long bullet, short barbell
Negative butterfly
Short Bullet, long barbell
It is not quite the same as convexity of the yield curve as if you visualise it you can have (for example)
Very steep short to medium rates and then flattening - the has a curve
flat curve short and medium and then steep long
Both these shapes have “curvature” but would faltten in different ways.