I believe ANY increase in curvature (up rates, or down rates) is a NEGATIVE butterfly. Conversely - ANY decrease in curvature (up rates or down rates) is a POSITIVE butterfly. I don’t believe it has anything at all to do with the direction of the shift…
I usually find this helps my understanding of the butterfly twist concept… >ï< Hope that helps 
Page 237, Volume 2 Schweser Practice Exams - Q49 Solution: “Bond A is priced at pare value. A negative butterfly shift would increase the humped nature of the yield curve, either through a bigger increase in the intermediate rates than than short and long rates, or a smaller decrease in intermediate rates than short and long term rates.” Hope that settles it.
SMicucci Wrote: ------------------------------------------------------- > Page 237, Volume 2 Schweser Practice Exams - Q49 > Solution: > > “Bond A is priced at pare value. A negative > butterfly shift would increase the humped nature > of the yield curve, either through a bigger > increase in the intermediate rates than than short > and long rates, or a smaller decrease in > intermediate rates than short and long term > rates.” > > Hope that settles it. Yes, I was only looking it from one side earlier. - Butterfly=change in rates makes the yield curve frown or frown more + Butterfly=change in rates makes the yield curve “smile” more
maybe like this: humps are bad and ugly (sorry if you are a hunchback!!) so, when humps go away, its a good thing! humps going away are a good thing (positive butterfly) Unfortunately, generally speaking we have ourselves humped yield curves. Thats what they do, they hump (kinda makes sense, if you wanna borrow for a WHILE longer, im going to want a WAY higher yield, sorry buddy!) So, we always have ourselves humped ugly yield curves. Except, sometimes, a positive butterfly happens! its weird, its positive, bye bye ugly hump! so, how could this be? that would only be if we COUNTERACT the natural hump: so, we need our short and long term rates to change MORE than the med term rates. Positive = bye bye hump, hello flatness: rates merging closer together, so short and long gotta boogie more. P.S. this thread had me on the floor in tears. Probably more indicative of my mind state than the funnyness of thread.
this is F**CKING CRAZY. I appreciate the effort but now i feel like rolling up in a cocoon (no pun intended) until the test if over. seriously …there has been no one (not even a person in real life) that can explain this.
justinkc Wrote: ------------------------------------------------------- > This is how i have it remembered. > > A positive butterfly shift, Something positive > makes you smile, and short and long term rates > increase more then rates in the middle. > > Whereas a negative butter fly shift, makes you sad > and you frown, short and long term rates move down > more then intermediate rates. > > May not be perfect, but has worked for me this guy for the pres.
Hate to do this to you guys, but, what EXACTLY do you consider ST and LT rates? If you have a look at question 13 from the 2011 CFA morning mock exam, you’ll know what I’m talking about. In that question, portfolio B and portfolio C are the only two that would give you the right answer. This is what the question provided: 1. scenario is expected to be a positive butterfly twist 2. key rate durations key rate, portfolio A, portfolio B, portfolio C 3m, .3, .2, .9 2yr, .4, .2, .9 5yr .3, 2.3, 1.1 10yr, 3.6, .3, .9 20yr, .5, .3, 1.0 30yr, .4, 2.3, .8 The real question is: For the ST rates do you use only the 3m? the 3m and 2yr? the 3m, 2y and 5yr? For the LT rates do you use the 30yr? the 30 and 20yr? the 30, 20 and 10yr? If you consider 3m as the ST and 30yr as the LT you have: Portfolio B wins! (in the ST B loses by .7, however, beats C in LT by 1.5) If you consider 3m and 2yr as the ST and 20yr and 30yr as the LT you have: Portfolio C wins! (in the ST B loses by 1.4, in the LT B wins by .5 => C wins) If you consider 3m, 2yr, 5y as the ST and 10yr, 20yr and 30yr as the LT you have(where are your mid term rates then?): who wins? (in the ST B loses by .2, in the LT B wins by .2)
It must be that you consider only the 3m and the 30yr but still, it would be good to get some confirmation