In the Lamont Cranston example, he has a choice between two US Treasury portfolios ( barbell or bullet). We’re provided Exhibit 70 on page 204, which includes both current modified duration and expected effective duration to help solve the problem. In the text below Exhibit 70, the text notes that the trader’s rate view on total return can be estimated using modified durations and convexity. But then, when the author actually calculates the expected loss from the rate increase, he uses effective duration in the calculation. So, we’re using effective duration because it is the only duration measure that’s given at the horizon?
Second question: It’s noted in Exhibit 70 that “raw” convexity is given. Is there any scenario where we might have to rescale convexity or do we always use what’s provided?