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Derivatives

  Derivatives   |   Terms
  • 2003
  • July 23, 2020
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Swap Convexity

The change in the dollar value of one basis point of a swap (swap DV01) in response to one basis point parallel shift in the swap curve. Swap convexity arises from the fact that the profit function of a swap is not linear (as in a futures contract), but rather it is convex: if interest rates go down, the swap’s profit is more than proportional, whilst if rates go up, the loss is also more than proportional. Therefore, if an interest rate swap is priced off the strip curve of Eurodollar futures, the resulting rates would be convex, opening up many arbitrage opportunities.


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