Hi guys!
I was working through the Equities and Fixed Income textbook, and I came across an example regarding the 'scaling' of convexity. The example provided was a with a duration of 5.0 and convexity of 0.235, find the return impact for a 1% (100bps) change increase in spread, which the textbook gave the following working,
Return impact = (-5.0x0.01)+(1/2)(23.5)(0.01)^2
Why was the convexity scaled to 23.5? if it was done to the convexity, mathematically speaking shouldn't it also be applied to the 5.0 for the duration? or am I missing something here?
Thanks in advance for reading!
I was working through the Equities and Fixed Income textbook, and I came across an example regarding the 'scaling' of convexity. The example provided was a with a duration of 5.0 and convexity of 0.235, find the return impact for a 1% (100bps) change increase in spread, which the textbook gave the following working,
Return impact = (-5.0x0.01)+(1/2)(23.5)(0.01)^2
Why was the convexity scaled to 23.5? if it was done to the convexity, mathematically speaking shouldn't it also be applied to the 5.0 for the duration? or am I missing something here?
Thanks in advance for reading!