Question 5 of the extra pdf chapter on yield curve strategies found online.
To increase the portfolio expected return we should buy call options on the long maturity bond futures in order to increase convexity. The rates on the long term bonds are expected to remain unchanged.
If they are expected to remain unchanged then why do we care about convexity? Is it not a better idea to sell put options instead?
In the paragraph they also said that she expects high volatility in rates; meaning we want to have the protection convexity offers.
Thanks, I missed that part. Assuming that the 30 year rate remained unchanged, is my reasoning correct?
Well they also said there was an increase in the butterfly spread, meaning there’d be more curvature in the curve; so you still wouldn’t really want to sell convexity… a better idea would be to shift to a more barbell’d portfolio if there’s an increase in curvature.