Duration and Convexity in Forex Trading: Academic Approach

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When investing in the foreign exchange market, it is important to understand the risks associated with duration and convexity. Duration and convexity measure the risks associated with interest rate changes, and foreign exchange investors must be aware of how these risks can affect their portfolio. In this article, we will discuss duration and convexity and how they can affect exchange rate fluctuations in the forex. Duration is a measure of sensitivity of a security’s price to changes in interest rates. The greater the duration, the higher the security’s sensitivity to changes in interest rates. This measure is often used when investing in fixed-income securities, such as bonds. It is also a useful tool for measuring the overall risk of an investment portfolio.

Convexity is a measure of how the duration of a security changes when interest rates change. When interest rates change, bonds and other fixed-income investments typically experience price changes in the opposite direction as the interest rate change. Convexity measures how the duration of a security changes as the interest rate moves. A security with high convexity is more sensitive to changes in interest rates and generally results in greater losses if interest rates move against the investor’s position.

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