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  • The Financial Encyclopedia
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Derivatives

  Derivatives   |   Terms
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  • April 23, 2021
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Convexity Risk Premium

The difference between the actual option premium and the option‘s estimated fair value. This difference arises because option sellers are usually unwilling to sell options at their estimated fair value at times of abnormal price movements in the underlying asset or security. For example, the convexity risk premium may result from sharp stock price changes.


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