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in BUS 2016H - Financial Mathematics by (580 points)
Please help me understand why a higher convexity is a better investment option from the point of interest rate risk. 

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If Convexity is high and

(a)interest rates go up, then all investments lose value BUT investments with high convexity lose value by LESS % than those with low convexity. For example, a 1% interest rate rise may result in a 2% drop in value for an investment with a high convexity while an investment with a low convexity will lose 25% in value. So as investors an increase in interest rates "benefits" those with a high convexity due to low % decreases in value of assets.

(b)interest rate drop , then all investments gain value BUT investments with high convexity gain value by MORE % than those with low convexity. For example, a 1% interest rate drop may result in a 25% increase in value for an investment with high convexity while an investment with low convexity will gain 2% in value. So as investors a decrease in interest rates "benefits" those with high convexity due to high % increases in value of their assets.

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