CONSTANT MATURITY TREASURY CONVEXITY CORRECTION

Mario Pucci ()
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Mario Pucci: Banca IMI SpA, Largo Mattioli 3, Milan 20121, Italy

International Journal of Theoretical and Applied Finance (IJTAF), 2014, vol. 17, issue 08, 1-15

Abstract: In a Constant Maturity Treasury (CMT) swap the exotic leg pays, for a given tenor, the yield-to-maturity computed out of a reference bond curve. This paper introduces a theoretical framework for the modelling of CMT that takes into account default risk of bond issuer. As an application, we obtain, under simple but standard assumptions, analytical convexity corrections for some fundamental payoffs contingent on the CMT.

Keywords: Convexity adjustment; default risk; constant maturity (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1142/S0219024914500514

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