Futures convexity adjustment
Definition · Level 10 · Derivatives pricing
Keep reading with Tradecraft
Without an account, you can read three definitions every 30 days. Tradecraft explains all 738 terms and strategies, with the lessons that teach them, flashcards that come back before you forget, quizzes and a payoff lab.
Gap between a futures price and the matching forward caused by daily margining when the underlying moves with rates. Tiny for equity index contracts, material for long-dated rate contracts.
Example
A 5-year-out SOFR future implies a higher rate than the matching FRA.
Where Tradecraft teaches it
Level 10 · Derivatives pricing, in the lesson “Forwards & futures: pricing by carry”: Price equity, FX and commodity forwards from the cost of carry, and know when futures differ.
Related terms
- Convenience yieldBenefit of physically holding a commodity (keeping a refinery running, avoiding a stock-out).
- Forward pricePrice fixed today for delivery at a later date, set by what it costs to buy and hold the asset until then — not a forecast.
- Implied dividendDividend level backed out of futures or put-call parity quotes — what the market is pricing, which can differ from analyst forecasts.
- 0.4 ruleAt-the-money-forward call or put ≈ 0.4 × S × σ × √T (small dividends, modest σ√T), because 1/√(2π) ≈ 0.4.
- Arbitrage boundsPrice limits any option must respect or someone locks in riskless profit: call ≤ S, European put ≤ K·e^(−rT), call ≥ max(0, S − K·e^(−rT)) without…
- Asian optionAverage-price option: payoff on the average over a set of fixings.