Global Convexity and Investing

A key consideration in trade and portfolio analysis is convexity or asymmetry in investment returns. A distinction should be made between market making activities where the focus is generally management of local convexity (gamma) and investing where global convexity plays an important role. The focus of this paper is global convexity or p&l analysis for large price dislocations. Convexity also plays a very important role in risk analysis. Investments that have positive global convexity loose less than a linear trade when there is a large adverse price dislocation and make more when there is a large favorable dislocation.