Convexity adjustment on a CMS swap

kiann · August 5th, 2009, 5:23 pm

Hi, a simple convexity adj question on CMS swaps...Should the convexity adjustment for a swap rate by (analytical formula)= +0.5 * y^2 * vol^2 * T * (G''(y)/G'(y))Where for example a conv. Adj. on a 10yr swap rate; y is 10yr swap, vol is vol of 10yr swap rate and G'' and G' are the first and second derivative of the swap price.; and T is the tenor of the swapOR even more simplistically= y^2 * vol^2 * T / (1 + y)

gc · August 5th, 2009, 5:31 pm

Both those adjustments are too crude (in terms of the assumptions that generate them); you won't be able to reproduce any of the rates on the markets (unless it's some minor currency where the bid/ask spread are really wide)....