May 2003
Beginner
288 pages
12h 25m
English
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11.3 Butterfly trades
10
Butterfly trades are another method by which traders can reflect a view on changing yield levels
without resorting to a naked punt on interest rates. They are another form of relative value
trade; amongst portfolio managers they are viewed as a means of enhancing returns. In essence
a butterfly trade is a short position in one bond against a long position of two bonds, one of
shorter maturity and the other of longer maturity than the short-sold bond. Duration-weighting
is used so that the net position is first-order risk neutral, and nominal values are calculated
such that the short sale and long purchase cash flows net to