Transcription of Understanding the Butterfly strategy - James Goulding
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Understanding the Butterfly strategy - James Goulding
THE WORLD'S LOCAL BANKUNDERSTANDING THEBUTTERFLY STRATEGYRI NOTES N 2002-01L. MARTELLINI, P. PRIAULETand S. PRIAULETRESEARCH AND INNOVATION NOTES N 2002-01 Understanding THE Butterfly STRATEGYL ionel Martellini1,Philippe Priaulet2 et St phane Priaulet 3 AbstractA Butterfly , which is a combination of a barbell and a bullet, is one of the most commonactive fixed-income strategies used by practitioners. While being neutral to small parallelshifts of the yield curve, a Butterfly is purposely exposed to specific bets on particularchanges of the yield curve. There exist four different types of butterflies, the cash-and$duration neutral weighting Butterfly , the fifty-fifty weighting regression, the regressionweighting Butterfly and the maturity weighting Butterfly . In this paper, we show that theygenerate a positive pay-off when the particular flattening or steepening move of the yieldcurve they were structured for capturing occurs.
quasi-perfect interest-rate neutrality when only small parallel shifts affect the yield curve. Besides, the butterfly, which is usually structured so as to display a positive convexity, generates a positive gain if large parallel shifts occur. On the other hand, as we let the yield curve be affected by more ... Understanding the Butterfly ...
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