Sorry this is a repost-don't know how to deleteHi I'm looking to value FED Funds futures vs 3m Libor basis swaps, however I am confused as to how to calculate these using Takada 2011 http://www.researchgate.net/publication ... :Currently
, I am valuing the basis swap as [PV(leg 1) - PV(leg 2)] / PV01(leg 1)Where leg 2 is the one you want to apply the spread to (i.e. the FF leg) priced by:The collateralized 3-month forward 'arithmetically averaged' OIS rate is given by equation 42 pg 15 where convexity adjustment is eqs 29 and 30. Is the above correct and what should the convexity adj in eq 42 represent:1) 'The AAON can be reasonably approximated by the RHS of 3? i.e. log(1+d(Ts,Te)Rc(Ts,Te)' 2) or do I find the compounded rate and subtract (d(Ts,Te)Rc(Ts,Te)^2)/2 (eqn4). 3) or 'the other convexity term is dynamic...' implies that an aditional convexity adjustment to 2) is needed which are found in eqs 29 and 30?I'm pretty confused and would appreciate any guidance!