Theory of Probability and Mathematical Statistics
Calculation of the convexity adjustment to the forward rate in the Vasicek model for the forward in-arrears contracts on LIBOR rate
N. O. Malykh, I. S. Postevoy
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Abstract: We calculate the convexity adjustment to the forward rate in the Vasicek model for the in-arrears forward contracts. With the help of the no-arbitrage market condition it is shown that such adjustment should be non-negative. Analytical formulas are found for the in-arrears interest rate options.
Keywords: Convexity adjustment, forward rate agreement, Vasicek model, no-arbitrage market, in-arrears LIBOR, iFRA.
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