Apologies for asking this here but no-one has replied in the General Forum.In short, do dealers price convexity into longer-dated IMM FRAs?For a research project, I obtained a small batch of high frequency quote data on sterling IMM FRAs ex Reuters (unfortunately it only covers the period Dec 02 to March 03). The quote data is on IMM FRAs out to the expiration of the eighth (short sterling) futures contract (RICs GBP3F1 to GBP3F8). When I compared the FRA midquotes to transaction prices on short sterling futures I find almost no difference. In fact FRA rates tended to exceed futures rates by 0.5 bp when I matched quotes/trades to within 60 seconds over this three-month sample period.While this was not surprising for the near FRA contracts, I though there would be evidence of a convexity adjustment in the longer-dated contracts. Rough back-of the-envelope calculations using the Hull-White and Ho-Lee model put the convexity adjustment for the eighth futures/FRA contract at 5-7 basis points, depending on assumptions.Hence I have the following questions:(i) Do sterling markets bother with pricing the convexity adjustent into FRAs?(ii) If convexity is priced into FRA rates, what are the popular models traders employ to estimate this adjustment?(iii) There is some recent US research that argues that the marking-to-market and collateralisation has reduced the convexity adjustment applied to swaps and other OTC products. Are such practices common with FRAs? In the UK? And have they had an impact on FRA pricing?Answers to any or all of these questions would be much appreciated!P.S. My IMM FRA quote data originated from a single dealer so I'm willing to concede that the data may be suspect.Cheers

Yes, traders certainly do price in convexity. I'm not really sure why you've not seen that in your figures.Are you sure you have good data? How liquid are the IMM FRA's?

Good dealers certainly do price convexity into FRAs.This is not to say that long-dated sterling FRAs are the most liquid of instruments (I've only done a trade like that once and it was more from necessity than by choice. The one time I did, a dealer I would consider good gave me a mkt about 1.5 bps wide, which is not bad at all). Due to this, I'd certainly avoid looking at real-time data. The reason for this is simply that even good dealers, while pricing everything correctly and giving you a relatively tight market, will, in my limited experience, never bother to actually publish it.I think you should look to see if you discover any evidence of convexity mispricing in the eod data, which should be somewhat more trustworthy. If you find mispricings there, I'd be inclined to think that the source is rubbish...

Thanks for the responses so far.Dougal12: I'm afraid that I don't have any data on the liquidity of IMM FRAs (versus standard maturity FRAs). I was hoping a trader in the FRA market could illuminate me.dkorsunsky: I've just downloaded some EOD data from Datastream for the period 19 March 2003 onwards - apparently they get it from Intercapital just after 4pm (London time) each trading day. However this data covers only the first four IMM dates. Nonethless, I get the same result when I compare the IMM FRA quotes with average short sterling futures transaction prices between 4.00 and 4.20pm: FRA midrates slighly exceed futures prices, and this pattern is consistent across all four contracts.BTW, what models do you use to get the convexity adjustment - Ho & Lee, Hull & White, Burghardt & Hoskins, Campbell & Temel ????