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Convexity Adjustment via Martingale Theory by swinki3 is a document available to read on EtoBox.
This document presents a martingale approach to deriving a convexity adjustment formula for interest rate derivatives when assuming time-dependent volatility. It motivates the work by establishing a no-arbitrage framework and relationship between yield rates and bond prices. The author derives an exact convexity adjustment formula and shows that previous approximations can be obtained from it, specifying the approximation error. As an application, the convexity bias between constant maturity swap (CMS) rate
- Author
- swinki3
- Language
- EN