Eurodollar Futures Convexity Adjustments in Stochastic Volatility Models
19 Pages Posted: 28 Oct 2004
Date Written: February 4, 2004
A formula that explicitly incorporates volatility smile, as well as a realistic correlation structure of forward rates, in computing Eurodollar futures convexity adjustments is derived. The effect of volatility smile on convexity adjustments is studied and is found significant.
Keywords: Eurodollar convexity adjustment, stochastic volatility, volatility smile, forward Libor models
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