Scenario 2: no change in the shape of the yield curve
Under Scenario 2, which of the following portfolio construction strategies is most
appropriate?
A. Selling convexity
B. Buying convexity
C. Decreasing the portfolio’s duration.
Answer is A. Can someone please help me make sense of this?
You get a benefit from convexity when yields change. All else equal yields on higher convexity bonds will be lower and low convexity bonds as investors pay for this benefit.
if you think yields will be static then you should sell these high convexity bonds versus long the lower convexity.
Buying convexity is buying volatility.