Convexity measure , Financial Management

We can measure the convexity with the help of following formula:

          1388_convexity measure.png                                                                   ...Eq. (4)


         Δy     =       Change in yield in decimal.

         V     =       Initial price.

         V-      =       Price if yields decline by Δy.

         V+     =       Price if yields increase by Δy.

It is necessary to understand following three points related to this convexity measure:

  • Convexity doesn't have a simple interpretation as in the case of a duration.

  • The value calculated in equation (4) is more popularly referred to as a "convexity of a bond" rather than the "convexity measure of a bond".

  • Last, the convexity measure reported by the dealers and vendors will differ for an option-free bond.

Posted Date: 9/10/2012 5:23:51 AM | Location : United States

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