Convexity of Asset and Liabilities

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zxfmontreal

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CFA 2013 Morning session 8D,
Given a parallel upward shift of 75bp of the yield curve and duration of asset=duration of liablity, if convenxity of asset is greater than convexity of liability, value of asset will fall less than value of liabilities. Economic surplus will increase. I get this part.
Then, now, if the yield curve has a downward parallel shift of 75bp, value of asset will increase faster than value of liability due to asset’s greater convexity, then economic surplus will also increase. Right?
Basically if asset has a greater convexity than liabilties, it is always bettter for the economic surplus I guess?
 
zxfmontreal wrote:
CFA 2013 Morning session 8D,
Given a parallel upward shift of 75bp of the yield curve and duration of asset=duration of liablity, if convenxity of asset is greater than convexity of liability, value of asset will fall less than value of liabilities. Economic surplus will increase. I get this part.
Then, now, if the yield curve has a downward parallel shift of 75bp, value of asset will increase faster than value of liability due to asset’s greater convexity, then economic surplus will also increase. Right?
Basically if asset has a greater convexity than liabilties, it is always bettter for the economic surplus I guess?
Click to expand...
correct.
You can draw the convexity curves out on paper. It might hep you.
 
i wrote something and realized i misunderstood someone elses post so i deleted it to avoid confusion
 
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