Duration and Convexity in Forex Trading: Academic Approach

2 min read

Duration and convexity are two important concepts in forex trading that help inform investors about the potential risks of investing in certain foreign currencies. Duration is the measure of how long it will take a forex trader to recover their initial investment, while convexity measures the degree of risk associated with that same investment. Generally, longer duration investments will have higher convexity, while shorter duration investments will usually have lower convexity. This is primarily because longer duration investments require more time and capital to recover should an investment not yield the expected returns. Understanding these two concepts can help forex traders determine the best foreign currencies to invest in and the appropriate level of risk to take on when investing.