Convexity Bias Management

Convexity Bias Management is the process of adjusting for the non-linear relationship between the price of a derivative and the price of the underlying asset. Because of this non-linearity, a simple hedge often becomes insufficient as the market moves.

This is known as convexity risk, and it can lead to significant losses if not properly managed. In options trading, this is primarily managed through 'gamma' and 'vega' hedging.

In crypto, where price moves can be extremely rapid and non-linear, managing convexity is a critical task for market makers and large traders. It involves the use of more complex derivative structures to ensure that the portfolio remains protected against large, sudden price swings.