Questions tagged [convexity]
The convexity tag has no usage guidance.
14 questions
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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 ...
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4
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What is the correct convexity adjustment for an Interest Rate Swap with unnatural reset lag?
I am looking at the valuation of an Interest Rate Swap (IRS thereafter) which is pretty much vanilla with one small tweak. Floating leg pays 3 months LIBOR in monthly intervals. To be precise: ...
- 331
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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 ...
- 101
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Convexity of an American put option
Is the price of an American put on an underlying without dividend convex with respect to the strike?
- 2,876
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Convexity adjustment for a forward swap rate
I recently heard that for a forward swap rate (for example, the fixed rate of a swap that will start in one year and end in five years), I need to do a convexity adjustment in order to get the right ...
- 111
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Sharpe Maximization under Quadratic Constraints
When doing Sharpe optimization
$$
\max_x \frac{\mu^T x}{\sqrt{x^T Q x}}
$$
there is a common trick (section 5.2) used to put the problem in convex form. You add a variable $\kappa$ such that $x = ...
- 1,641
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OIS curve convexity adjustment
Since, as far as I understand, an Overnight Index Rate is 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 take ...
- 552
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Convexity Adjustment of Daily Compounded Swap under Hull-White Model
I am working on a problem that deals OIS daily compounded swap under Hull-White 1-factor model. I am struggling with pricing the floating leg, on a delayed payment date:
$E^{T^p}_t[\prod_{i=0}^{n-1} (...
3
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3
answers
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Leveraged ETF pair trade, where's the gamma/convexity?
I'm trying to better understand leveraged etfs, and specifically how they have convexity and volatility decay similar to options.
An older post on this site asked a similar question and one of the ...
- 31
3
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answer
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Convexity adjustment when payment if after interest natural term?
I've been working with a convexity adjustment for an interest rate payoff and the next question came to me:
The usual problem that gives rise to the convexity adjustment I'm referring to is as ...
- 302
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1
answer
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RFR boostrapping using RFR OIS: Is convexity adjustment technically necessary?
For single-curve RFR bootstrapping, such as a SOFR-based discounting curve bootstrapped strictly using SOFR fixed-float OIS, I am trying to understand if convexity adjustments are technically ...
- 21
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1
answer
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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 ...
- 207
1
vote
1
answer
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How to transform a cubic optimisation problem into a quadratic for portfolio allocation
I have the following cost function for portfolio allocation:
$$
w^T\mu-\frac{1}{2}\gamma w^T\Sigma w+\frac{1}{6}\gamma^2 w^TM_3(w\otimes w),
$$
which considers also the co-skewness ($M_3$ tensor), $\...
- 326
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FX options: is convexity usually heavily overpriced?
I have access to daily vol quotes for EURUSD options from 2006 to today. I was playing around with them and constructed a "daily rolled backtest" for various options constructs, like ...
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