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.
- Do most models assume 1 correlation between the spot rate and the forward rate?
- Any models thay take the correlation under consideration?