This is the second in a series of differently weighted butterfly swaps. I will adjust the list below, as I add more butterfly swaps:
- Cash & Duration Neutral Butterfly (aka Duration-Hedged Barbell)
- Fifty-Fifty Butterfly Swap
- Regression Weighted Butterfly Swap
- Maturity Weighted Butterfly Swap
Note: Although this type of swap shows positive convexity at changes of + or – 25 basis points, it does not necessary display positive convexity for smaller yield changes.
Things to consider:
- This swap gets its name from both Wings being equally duration weighted against the body. The wings each have the same $duration as half the Body, when weighted by par value. (Curve neutral to steepening and flattening shifts, while the Body yield remains constant.)
- Like other swaps in this series, instantaneous parallel shifts, either up or down, will show a profit (positive convexity).
- Unlike the Cash & Duration Neutral swap, this swap is not cash neutral and requires additional cash to initiate the trade.
- More likely be used to take advantage of arbitraging an expensive Body yield, relative to the Wings.
Allows for analysis of parallel swifts:
Also analysis of steepening or flattening curve movements: