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How do you build a duration-neutral bond portfolio which is long convexity? can you give me an example?

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I would say you can go

  • Long a bond with a low coupon

  • Short a bond with a higher coupon

For instance current for US Treasury circa 10Y

  • 2% 15NOV26, BPV 8.7265, Convx 89.9624
  • 1.5% 15AUG26, BPV 8.3071, Convx 87.9649

Buy 1,000,000 of the 1.5% and Sell 951,939 of the 2% would give you positive convexity and 0 duration. Of course more extreme coupon differential will give you a much better convexity exposure.

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  • $\begingroup$ your example "long 1,000,000 @ 2% and short 1,006,056 @ 1.5% contradicts your statement "Long a bond with a low coupon and Short a bond with a higher coupon" $\endgroup$ – Nicholas Nov 22 '16 at 21:19
  • $\begingroup$ I had used modified duration instead of BPV when I skipped the spot consideration, that's why it didn't work, fixed it. $\endgroup$ – Lliane Nov 23 '16 at 0:10
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More typically this refers to a portfolio like:

Long 100MM 10yr bond with coupon 3% Short 180MM 5yr bond with coupon 3%

with the principal amounts chosen such that the BPVs in dollars are equal. This portfolio is long convexity.

The term "duration neutral" does not imply matched maturity.

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