can someone please explain in BB example #1 of reading 23. Why is that Ashok Pal who thinks the interest rates to remain stable will not choose ‘Roll down/ride the yield curve’ strategy?
I didn’t get that either. I think he should as well.
It could be that enough information is not given – Is the yield curve upward sloping? So then sell convexity is the safe answer.
But again, I dont know for sure.
Since interest rate is expected to be stable, yield curve will also be expected to be stable, thus it make sense to sell convexity as against riding the yield curve.
olajidean
Riding the yield curve is employed in a stable environment as well so I don’t understand your response.
I think, to ride the yield curve, yield curve should be upward sloping besides stable yield cuve, that way investors can buy longer term bond and sell it after few years when bond’s yield decline as it comes near maturity (and price go up).
To sell convexity, only stable yield curve is the requirement because then investor can sell convexity by selling options and earn premium and assuming he is right, options will be end up worthless
Just to be clear, we buy convexity when we anticipate a change in interest rates soon. So in example 1, why doesn’t Indira Gupta buy convexity along with a bulleted portfolio?