principles of convexity

Convexity refers to the shape of a curve or surface where, for any two points within it, the line segment connecting them lies entirely inside or on the shape. In finance, convexity measures how the price of a bond changes as interest rates fluctuate, capturing the curvature in the price-yield relationship. High convexity indicates less risk because the bond's price is less sensitive to interest rate changes, providing a cushion during market shifts. Essentially, convexity describes how a curve bends, offering insight into stability and risk in various contexts.