Calculate the total convexity/timing adjustment in Example 30.3 of Section 30.4 if all cap volatilities are 18%
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Calculate the total convexity/timing adjustment in Example 30.3 of Section 30.4 if all cap volatilities are 18% instead of 20% and volatilities for all options on 5-year swaps are 13% instead of 15%. What should the 5-year swap rate in 3 years' time be assumed for the purpose of valuing the swap? What is the value of the swap?
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Muhammad Salman Alvi
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