# Questions tagged [convexity]

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Since, as far as I understand, an Overnight Index Rate is a set in arrears, i.e. it is published in the morning after the night to which the rate applies, then I would have thought that we should be ...
127 views

### convexity adjustment for pricing mark to market (mtm) cross currency swap

may I know where the convexity adjustment is from and in practice, how is it usually calculated? is it coming from the correlation between fx and rates ? am I right that non-mtm cross currency swap ...
137 views

### Forward price vs. futures price - Wilmott

I am reading Paul Wilmott's book PWOQF2, and there is something I don't get in his derivation of the convexity adjustment between forward and futures prices (chap. 30). He models $S$ and $r$ ...
86 views

### Estimation of LIBOR 3M periods if the period is not exactly 3M months

When generating dates of interest rate swaps, even without stub periods, we sometimes end up with periods that are less than 3 months (say 87 day). In that case do we have to apply any kind of ...
67 views

### B-splines: convexity in IV/Price

I see that the justification of the need to use cubic B-splines when interpolating in the strike-IV space is to impose a convexity constraint to get rid of potential arbitrage. I could easily ...
39 views

### Does convexity in the IV space means convexity in the price space?

Let's assume that we only look at OTM options to construct a Risk Neutral Density (RND). As the RND is the second derivative of the price of the option with respect to the strike, we would expect ...
75 views

### Hedging convexity for long-dated fixed cashflows

I'm wondering what are the different ways of hedging the convexity in fixed long-dated cashflows (maturity > last liquid point). Also, if you'd say receiver swaptions would be the way to go, could you ...
186 views

### Price Alignment Interest(PAI) Convexity Effect

I've been looking at convexity adjustments in ED's for several years(more opportunities a few years ago then currently) and was wondering if my thinking on PAI impact on swaps convexity is correct. ...
240 views

### Why are FRA/futures convexity adjustments necessary?

This would be my explanation for the reason that convexity adjustments must exist: Futures are margined daily, such that if a trader is paid a future and rates goes up then money is paid into their ...
48 views

### Convexity Adjustment on sensitivity computation for Futures

Convexity adjustment is a correction term that helps in deriving futures price from forward price and vice versa. But, will this convexity adjustment come into play when we are trying to compute ...
104 views

### MBS Market Duration & Convexity

Soft question...hopefully. I am working on a swaption hedging strategy. Part of this strategy calls for a forward looking indication of changes in implied volatility, using 1m10y implied as a proxy ...
582 views

### Why is there a convexity adjustment if the payment date differs from Libor end date?

A 3 month LIBOR that fixing at $T$, paying in 3 months does not have a convexity adjustment. However, 3 month LIBOR fixing at $T$, paying in 6 months needs a convexity adjustment. How is this shown ...
106 views

### Convexity adjustment--Assume sport and futures rates move together?

A cash flow argument I typically see for why a convexity adjustment is necessary is the following (taken loosely from Hull 9/e, p. 143): Say I am short an interest rate futures contract (e.g. ...
137 views

### Why isn't a quanto adjustment needed in this case?

Suppose we have a contract with payoff $P_Y$ in currency $Y$, where $P_Y$ on a variable in currency $Y$. To calculate the value in $X$, we take the expected payout under $Y$-numeraire $E_Y(P_Y)$, ...
338 views

### Can two bonds have same yield and price but different convexity?

In the market, if there are two bonds that have the same yield and price, then the higher convexity bonds will be more attractive. However, this would mean the market would increase the price of the ...
225 views

### Curve steepner and convexity

Can someone please explain why a curve steepener trade has a negative convexity? And are the gains from the steepness of the curve offset by the negative convexity?
172 views

### 20s30s curve convexity

Let’s assume I trade a 20s30s spread on the curve and i’m flat delta (-100k on 20Y swap, 100k on 30y swap dv01). If the market moves, i’m not flat delta anymore. Is there a simple way to estimate the ...
33 views

### Utility Maximization on a finite Probability Space. Possible mistakes in a paper?

I am currently reading this paper on utility maximization in a financial market model. On page 5 the author starts with the case of a finite probability space and on page 19 he considers the ...
108 views

In this report on volatility from BNP Paribas, https://globalmarkets.bnpparibas.com/r/Volatility_Express_20171128.pdf?t=BG3REXwMP3NZJRN7wY5Vt&stream=true it states on Page 10 that the SPX ...
198 views

### Bond Convexity and Maturity

What the reasoning for why bond convexity increases with maturity. Heuristic explanations are somewhat better as I would like a fundamental understanding. Also what causes a more convex bond to be ...