Question

Calculate the total convexity/timing adjustment in Example 34.3 of Section 34.4 if all cap volatilities are $18 \%$ instead of $20 \%$ and volatilities for all options on 5 -year swaps are $13 \%$ instead of $15 \%$. What should the 5 -year swap rate in 3 years' time be assumed for the purpose of valuing the swap? What is the value of the swap?

   Calculate the total convexity/timing adjustment in Example 34.3 of Section 34.4 if all cap volatilities are $18 \%$ instead of $20 \%$ and volatilities for all options on 5 -year swaps are $13 \%$ instead of $15 \%$. What should the 5 -year swap rate in 3 years' time be assumed for the purpose of valuing the swap? What is the value of the swap?

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Options, Futures, and Other Derivatives

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 34, Problem 5

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Step 1

In Example 34.3, the convexity/timing adjustment is calculated as follows: Convexity/Timing Adjustment = (Cap Volatility - Swap Volatility) * (Swap Maturity - Cap Maturity) For the original cap volatilities of 20% and swap volatilities of 15%, and a swap maturity Show more…

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Calculate the total convexity/timing adjustment in Example 34.3 of Section 34.4 if all cap volatilities are $18 \%$ instead of $20 \%$ and volatilities for all options on 5 -year swaps are $13 \%$ instead of $15 \%$. What should the 5 -year swap rate in 3 years' time be assumed for the purpose of valuing the swap? What is the value of the swap?

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