Login

+2 votes

Best answer

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.

- All categories
- BUS 1003H - Introduction to Financial Risk (52)
- BUS 2016H - Financial Mathematics (55)
- BUS 3018F - Models (74)
- BUS 3024S - Contingencies (61)
- BUS 4028F - Financial Economics (39)
- BUS 4027W - Actuarial Risk Management (54)
- BUS 4029H - Research Project (5)
- Mphil (1)
- Calculus and Pure Mathematics (4)
- Statistics (16)

...