The Future is Convex
نویسندگان
چکیده
We present analytical approximation formulæ for the price of interest rate futures contracts derived from the yield curve dynamics prescribed by a Libor market model allowing for an implied volatility skew generated by displaced diffusion equations. The derivation of the formulæ by the aid of Itô-Taylor expansions and heuristic truncations and transformations is shown, and the results are tested against numerical calculations for a variety of market parameter scenarios. The new futures convexity formulæ are found to be highly accurate for all relevant market conditions, and can thus be used as part of yield curve stripping algorithms.
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