Bond trading strategies butterfly
A butterfly strategy can exploit this difference, because intermediate-term bonds are less convex than are either long-term or short-term bonds. A bond trading strategies butterfly business man standing in front of a finance chart. Butterfly trades react to these changes with profits or losses.
Share Share on Facebook. Traders can partially hedge their butterfly trade risks with other, offsetting trades. The dumbbell forms the "wings" of the butterfly.
A smiling business man standing in front of a finance chart. A bond's duration decreases as its maturity date approaches, so short-term bonds have lower durations. However, the shape of the yield curve can change because of changes to interest rates, frequently because of economic or political events.
Butterfly in Fixed Income Trading Strategies. Profits and losses from butterfly trades depend on how the yield curve changes shape bond trading strategies butterfly time and on whether the shape change is uniform throughout all maturities or affects certain maturities more than it does others -- in part due to the bonds' durations. The profit potential of such trades rests in part on the bond trading strategies butterfly "convexity," which is the U-shaped relationship you get when you plot bond prices against their yields. Traders can partially hedge their butterfly trade risks with other, offsetting trades.
For example, imagine two bonds having the same duration and yield, and that interest rates suddenly change. In a simple example of a bond trading strategies butterfly trade, a bond trader might load up on bonds with maturities of four and eight years -- the butterfly's wings -- and short the six-year bonds, which constitute the butterfly's body. Traders can partially hedge their butterfly trade risks with other, offsetting trades.