I'm wondering what are the different ways of hedging the convexity in fixed long-dated cashflows (maturity > last liquid point). Also, if you'd say receiver swaptions would be the way to go, could you elaborate a bit on why this is the case? Thanks a lot and quant away! :)
I think theoretically if you were trying to hedge the convexity of a 30yr swap you could sell 1 day atm receiver and payer swaptions where the underlying is also maturing ("walking") along with your 30yr swap, in the amount of the calculated convexity of the 30yr swap on that day. In practice you would do 1m,3m or 6m type options and maybe have the underlying walking but it doesn't matter that much. This is also more well known as a mortgage replication trade.