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I have a problem with the underlying assumption in the future/forward convexity adjustment. If I understand correctly, the assumption is, if I am long ED, I earn money when rates go down and invest the money in a lower rate and vice versa. What I don't agree with is that the correlation between the spot rate and for example EDU5 is very far from 1, sometimes it is even negative (especially in a crisis). So I may earn money on long EDU5 and invest the earnings in a higher rate, as the spot rate is going high as well.

  1. Do most models assume 1 correlation between the spot rate and the forward rate?
  2. Any models thay take the correlation under consideration?
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My thoughts are that I am missing a concrete question. –  vonjd Jul 16 '13 at 13:07
    
I guess the question is "why is the standard convexity adjustment wrong according to current market rates?" –  Phil H Jul 16 '13 at 13:14
    
I'am afraid that all the models for convexity adjustements I have seen state these values are correlated. This is a common case where models differ from market datas. –  lmorin Jul 16 '13 at 13:19
    
I think it is not the aim of this community to "guess questions" ...voting to close. –  vonjd Jul 16 '13 at 13:26
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@user5726: edit your question instead of posting comments. –  Joshua Ulrich Jul 17 '13 at 20:39
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