• Convexity is a risk management tool used to measure and manage a portfolio’s exposure to market risk.
  • Convexity is a measure of the curvature in the relationship between bond prices and bond yields.
  • Convexity shows how the duration of a bond changes when the interest rate changes.
  • If the duration of a bond increases as the yield increases, the bond is said to have negative convexity.
  • If the duration of a bond increases and the yield falls, the bond is said to have positive convexity.