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TMG Financial Products Inc. 475 Steamboat Road Greenwich, CT 06830. Thomas S. Coleman 15 November 1995. VP, Risk Management, 203-861-8993 revised 30 August 1996. CONVEXITY ADJUSTMENT FOR CONSTANT MATURITY SWAPS AND. LIBOR-IN-ARREARS BASIS SWAPS 12. INTRODUCTION. The CONSTANT Maturity Swap or Treasury (CMS or CMT) market is large and active. The difficulty of evaluating the implicit CONVEXITY cost, however, makes the markets more opaque than would otherwise be the case. This note lays out a practical method for calculating the value of the CONVEXITY ADJUSTMENT for the linear CMS/CMT and LIBOR-in-arrears payments.
Coleman - CMS/CMT convexity 2 The result is the convexity-adjusted PV of the instrument. The convexity adjustment can be measured on a reset-by-reset basis as a spread equal to the difference between the adjusted
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