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Duration and Convexity (Hull's EOC 4.22 and 4.33)

Active Member
On Practice Question Hull 4.22 :
@David Harper CFA FRM While Calculating the Bond Price Change Due to a .2% decrease in Yield, why are we not also factoring in the Convexity Adjustment..?

Active Member
On Practice Question Hull 4.33:-
@David Harper CFA FRM If Price % Decline of Portfolio A is less that is Risk/Exposure of Portfolio A is less, then shouldn't Convexity of Portfolio A be less than of that Portfolio B ..?

Thanks for all the help on this topic..

QuantMan2318

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With respect to one above, for very small changes in yield, the convexity adjustment is not required as the majority of the change in price is explained by the first derivative

Delta B/(B) = - (1/B) * dB/dY *Delta Y where the Mac D is explained by -(1/P) *dP/dY

With respect to your second question, convexity smoothens out the price changes, as @David Harper CFA FRM likes to point out, convexity is a Bond Investor's friend both ways, so, if the price changes are less compared to a change in Yields, it implies that the convexity is more

Consider this, convexity is your curvature, if the curvature is more, say, (1/2)*c*(dY)^2 is more, the negative change in price to Yield effect is reduced. Therefore, if the Price decline is lower, the Convexity is higher

Thanks
Mani

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