Convexity

Convexity is a term used in various fields such as mathematics, economics, and finance. In the context of finance, it refers to a measure of the sensitivity of the duration of a bond to changes in interest rates. Convexity is used as a risk-management tool, and helps to measure and manage the amount of market risk to which a portfolio of bonds is exposed.

Definition

In finance, convexity is a measure of the curvature in the relationship between bond prices and bond yields. Convexity demonstrates how the duration of a bond changes as the interest rate changes.

Convexity in Finance

In finance, convexity is used to measure the risk of a bond, or a portfolio of bonds, to changes in interest rates. It is a measure of the curvature of the price-yield relationship of a bond, and is therefore a measure of the bond's price sensitivity to changes in yields.

Convexity in Mathematics

In mathematics, a set is said to be convex if, for every pair of points within the set, every point on the straight line segment that joins the pair of points is also within the set.

Convexity in Economics

In economics, convexity refers to the shape of the production possibility frontier (PPF) and the indifference curve. A convex PPF indicates increasing opportunity costs, while a convex indifference curve indicates diminishing marginal rate of substitution.

See Also

• Bond Duration
• Interest Rate
• Risk Management
• Economics
• Mathematics

References

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