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Convexity

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  • Convexity

    I've been studying for FM using the Broverman study guide and book, and very little mention has been made about convexity. The study guide doesn't even mention it at all. I was wondering how important a concept it is to know for this exam. Also, is convexity c = (d^2p/di^2)/p?

  • #2
    Is it on the SOA's syllabus for exam FM?
    Whether you are the lion or the gazelle, when the sun comes up, you better be running.

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    • #3
      nm, I remember now. It's the part on immunization. I think your formula is correct. I remember it as P''(i)/P(i). It's a very new part of the exam and I don't remember off hand whether there was a question on this last exam sitting. If there was, it was no more than one problem. The immunization problem was very simple.
      Whether you are the lion or the gazelle, when the sun comes up, you better be running.

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      • #4
        I believe its on the syllabus:

        Candidates will know definitions of key terms of modern financial analysis at an introductory and intuitive level, and be able to complete basic calculations involving such terms: yield curves, spot rates, forward rates, duration, convexity, immunization, and short sales.

        this was taken from the current fall 2005 syllabus, found here: http://www.soa.org/ccm/content/exams...-2005-exam-fm/

        however, i'm unsure where to find the concept of "convexity" in the Broverman textbook ex. 3. I assume its in ch7, which is the same portion immunization is, but for some reason I can't find it. Whatever, i'll just memorize that convexity is P''/P, without learning the information behind it. can someone give a small explanation as to how convexity relates to the present value of a set of cashflows with respect to interest rates?

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        • #5
          For those who do not have access to the material on convexity, can anyone give a brief explanation as to how convexity relates to the material?

          All I got is (from the posts above): convexity = c = P"(i)/P(i)

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