(Difference between pages)
imported>Administrator |
imported>Doug Williamson |
| Line 1: |
Line 1: |
| 1. Broadly, convexity measures the curvature of the line representing the relationship between an instrument’s yield and its value.
| | The risk for a borrower of an adverse change in its borrowing margin. |
| Duration and Modified duration can be used as the basis for straight line estimates of the rate of change of price/present value. Convexity is an estimate of the rate of change of duration. This is often visualised as the degree of 'curviness' of the line representing value versus yield.
| |
| Convexity is calculated as:
| |
|
| |
|
| '''Sum [PV x t x (t+1)]/Sum(PV)'''
| |
|
| |
|
| 2. More strictly defined, convexity is the rate of change of duration, and modified convexity is the rate of change of modified duration, for small changes in yield from the given starting yield.
| |
|
| |
| 3. More loosely, the terms ''Convexity'' and ''Modified convexity'' are often used interchangeably. Obviously this can lead to potential confusion, so it is important to clarify whether convexity or modified convexity is intended in any particular context.
| |
|
| |
|
| == See also == | | == See also == |
| * [[Duration]] | | *[[Margin]] |
| * [[Modified convexity]]
| |
| * [[Modified duration]]
| |
|
| |
|
| |
|
| | [[Category:Identify_and_assess_risks]] |
Latest revision as of 07:18, 29 June 2022
The risk for a borrower of an adverse change in its borrowing margin.
See also
