What is 'convexity adjustment' in SAP FS-BA-PM-HP - Hedge Processes?

convexity adjustment - Overview

• Component: FS-BA-PM-HP

• Component Name: Hedge Processes

• Description: Adjustment of forward interest rates for interest-rate transactions that have variable components. Is used if the value date of a variable cash flow is different from the normal value date of the reference interest rate. Convexity adjustment is used to value swaps, for example, that pay the interest rate of a 10-year bond every six months in exchange for a fixed interest rate.

convexity adjustment - Details

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  Key Concepts: 
  Convexity adjustment is a process used in the FS-BA-PM-HP Hedge Processes component of SAP. It is used to adjust the value of a financial instrument to account for the non-linear relationship between its price and yield. This adjustment is necessary to ensure that the instrument's value reflects its true market value. 
  
  How to use it: 
  The convexity adjustment process is used when calculating the value of a financial instrument. It takes into account the non-linear relationship between the instrument's price and yield, and adjusts the value accordingly. This ensures that the instrument's value reflects its true market value. 
  
  Tips & Tricks: 
  When using convexity adjustment, it is important to remember that it only applies to financial instruments with non-linear relationships between their price and yield. If the relationship between the two is linear, then no adjustment is necessary. 
  
  Related Information: 
  For more information on convexity adjustment and other processes used in FS-BA-PM-HP Hedge Processes, please refer to SAP's official documentation.