I’m having trouble wrapping my head around “butterfly trades” and was hoping someone can clarify. I understand the shifts in the yield curve and curvature, but the actual action of the trade is what is confusing me.
My impression
Positive Butterfly Trade( Long the body, Short the Wings)
Negative Butterfly Trade( Long the wings, short the body)
I did a mock exam where the yield curve had an decrease curvature, lowering the midpoint of the yield curve, resulting in a positive butterfly twist/shift.
My answer was to do a positive butterfly trade, however i got that wrong, stating that a negative butterfly trade was the appropriate answer. A negative butterfly trade actually means Long Body, short wings.
I checked the CFAI curriculum, and there’s no reference to a butterfly trade. Can someone confirm the action of the trades?