Convexity: Difference between revisions
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imported>Doug Williamson (Simplify and align with ACT glossary for clarity.) |
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Convexity measures the curvature of the profile representing the relationship between an | 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: | Convexity is normally calculated as: | ||
Sum(PV x t x (t + 1) ) / Sum(PV). | |||
Where: | Where: | ||
PV = Present Value of individual cash flows | PV = Present Value of individual cash flows. | ||
t = timing of 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. | 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. | ||
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Obviously this can lead to confusion, so it is important to clarify whether convexity or modified convexity is intended. | 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: | [[Category:Manage_risks]] | ||
[[Category: | [[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.
