Why is convexity not a free lunch on a static yield curve?
I saw a discussion saying you can earn from convexity even if the yield curve stays static, and that sounds too easy. What is the right interpretation?
Your skepticism is correct. Convexity does not generate return by itself in a completely motionless market. The more defensible interpretation is that convexity becomes valuable when yields fluctuate over time, when the manager rebalances, or when the portfolio is exposed to rate volatility around an average level.
So the exam-safe version is: convexity is economically useful through path and volatility, not as a magical extra coupon. Join our community for peer discussion if you want more examples of how that wording changes multiple-choice answers.
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