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xingwei86524
Topic Author
Posts: 19
Joined: April 11th, 2018, 8:06 pm

convexity adjustment

July 24th, 2018, 1:10 am

Hi,

For a libor in arrears payment, there is a convexity adjustment for the forward rate.  Is this convexity adjustment always evaluate to positive?

Thanks
 
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bearish
Posts: 5158
Joined: February 3rd, 2011, 2:19 pm

Re: convexity adjustment

July 25th, 2018, 3:17 am

In general, the sign of a convexity adjustment is decidedly positive, as per Johan Jensen. Complications may arise when the convex pay-off function is intertwined with other issues, like measure changes, curve slope, discounting vs projection curves, etc.
 
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mtsm
Posts: 352
Joined: July 28th, 2010, 1:40 pm

Re: convexity adjustment

August 1st, 2018, 1:36 am

bearish: ehnt

It depends what you call a convexity adjustment. 

If you define it as the adjustment that needs to be made to the expected value when valueing the index of interest under a measure other than the index's natural measure, then the convexity adjustment can be of either sign. This is a meaningful definition for a convexity adjustment. It is decidedly not necessarily positive in general!

For LIA, yes it is.
 
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bearish
Posts: 5158
Joined: February 3rd, 2011, 2:19 pm

Re: convexity adjustment

August 1st, 2018, 11:01 am

Now you are expanding the definition. The question was specifically addressing the convexity adjustment arising from Libor being set in arrears. 
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