Butterfly Twists depend, original, increase, decrease

ruchita

Are the two definitions (below) consistent/identical?

1) Positive: less curvature; Negative: more curvature.

2) Positive: higher increase in short- and long-term maturities than mid-term, lower decrease in short- and long-term maturities than mid-term; Negative: vice versa.

Doesn't it depend on the original shape of the yield curve?

Kapie

Dude you cant be serious with this post.

chaojimali

Mimician Wrote:
-------------------------------------------------------
> Are the two definitions (below)
> consistent/identical?
>
> 1) Positive: less curvature; Negative: more
> curvature.
>
> 2) Positive: higher increase in short- and
> long-term maturities than mid-term, lower decrease
> in short- and long-term maturities than mid-term;
> Negative: vice versa.
>
> Doesn't it depend on the original shape of the
> yield curve?

Positive butterfly:
- if curve shifts up, long and short term rates rise MORE relative to mid-term rates
- if curve shifts down, long and short term rates fall LESS relative to mid-term rates

Negative butterfly:
- if curve shifts up, long and short term rates rise LESS relative to mid-term rates
- if curve shifts down, long and short term rates fall MORE relative to mid-term rates

Easiest probably to remember that negative butterfly shifts make the curve more humped, or in mathematical terms, more concave down. The positive butterfly shift makes the curve less concave down, or in an extreme case, maybe even concave up (which might make the before and after resemble a butterfly!).

tarunajwani

you just need to draw a picture and increase/ decrease the rates on each matuarity then you can see the effect clearly