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Sell Convexity Strategy

January 28, 2018

Recall that the price of a bond with higher convexity increases more if interest rates decrease, and decreases less if interest rates increase, than does the price of a equal-duration but lower-convexity bonds.

If portfolio managers expects future volatility to be less than what current prices reflect they can sell convexity by selling calls on bond held in the portfolio for example. Income from writing calls will increase yield and decrease convexity.

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