5.7 calcConvexityAdjustment

Function File: [adj_rate adj] = calcConvexityAdjustment (valuation_date, instrument, r, sigma, t1, t2)

Return convexity adjustment to a given forward rate with specified forward start and end dates and forward volatility. For CMS Rate adjustments use function get_cms_rate.
Implementation of log-normal convexity adjustment according to H.P. Deutsch, Derivate und Interne Modelle, 4th Edition, Section 14.5 Convexity Adjustment. Normal model convexity adjustment just uses absolute volatility (sigma) instead of relative volatility (sigma*r). Input and output variables:

• valuation_date: valuation date [required]
• instrument: instrument struct or object (with model, basis) [required]
• r: forward rate [required]
• sigma: forward volatility (act/365 continuous) [required]
• t1: forward start date [required]
• t2: forward end date [required]
• adj_rate: OUTPUT: adjusted forward rate
• adj: OUTPUT: adjustment only

See also: timefactor.