Questions tagged [convexity]

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10
votes
3answers
2k views

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: ...
0
votes
2answers
242 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 ...
7
votes
3answers
586 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 ...
8
votes
5answers
19k views

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 ...
6
votes
1answer
2k views

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
vote
1answer
173 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 ...