Convexity: Difference between revisions
From ACT Wiki
Jump to navigationJump to search
imported>Doug Williamson m (Spacing and indentation) |
imported>Doug Williamson (Improve calculation.) |
||
| (6 intermediate revisions by the same user not shown) | |||
| Line 1: | Line 1: | ||
Convexity measures the curvature of the profile representing the relationship between an [[instrument]]’s or a [[portfolio]]'s yield and its value. | |||
Convexity is normally calculated as: | |||
Sum(PV x t x (t + 1) ) / Sum(PV). | |||
Where: | |||
PV = Present Value of individual cash flows. | |||
t = timing of cash flows. | |||
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. | |||
More loosely, the terms ''Convexity'' and ''Modified convexity'' are sometimes used interchangeably. | |||
Obviously this can lead to confusion, so it is important to clarify whether convexity or modified convexity is intended. | |||
== See also == | == See also == | ||
* [[Duration]] | * [[Duration]] | ||
* [[Effective convexity]] | |||
* [[Modified convexity]] | * [[Modified convexity]] | ||
* [[Modified duration]] | * [[Modified duration]] | ||
[[Category:Manage_risks]] | |||
[[Category:Risk_frameworks]] | |||
Latest revision as of 19:18, 15 January 2016
Convexity measures the curvature of the profile representing the relationship between an instrument’s or a portfolio's yield and its value.
Convexity is normally calculated as:
Sum(PV x t x (t + 1) ) / Sum(PV).
Where:
PV = Present Value of individual cash flows.
t = timing of cash flows.
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.
More loosely, the terms Convexity and Modified convexity are sometimes used interchangeably.
Obviously this can lead to confusion, so it is important to clarify whether convexity or modified convexity is intended.
