The curvature of the price-yield relationship, which refines the duration estimate for large yield moves. Positive convexity benefits the holder.
Where you will meet it
Convexity comes up in 16 learning outcome notes across the FRM syllabus.
A few of them:
Properties of Interest Rates FRM Part I · Financial markets and products
“Convexity measures that curvature.”
Calculating and Applying VaR FRM Part I · Valuation and risk models
“Their value is a curved or kinked function of the risk factor, and gamma or convexity matters.”
Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques FRM Part II · Liquidity and treasury risk measurement and management
“Duration gap management assumes small parallel shifts of the yield curve, and it uses a linear approximation that ignores convexity, so large moves are misestimated.”
Arbitrage Pricing with Term Structure Models FRM Part II · Market risk measurement and management
“The expected rate and the discount factor are correlated, a convexity effect.”
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