KIS Weekly 12

Hot Issues

1. FRN Convexity Adjustment

Convexity Adjustment

02) 3770 0435

FRN Convexity Adjustment

FRN Convexity Adjustment ,

Convexity Adjustment FRN .

I. Convexity Adjustment

( 3,5, 1 5) FRN , 3 CD
3 FRN .
Implied Forward Rate Coupon ,
Convexity Adjustment Forward Rate Coupon .

(Exotic interest rate instruments)

, Euro Dollar Forward Rate , Swap(Plain Vanilla Swap) LIBORin-Arrears Swap( Arrears Swap) , CMT Swap Convexity
Adjustment . FRN( Plain Vanilla Swap)
, 1, ,

2. (3 CD)

Convexity Adjustment .

Convexity Adjustment Plain Vanilla Swap Arrears Swap

. Arrears Swap Plain
Vanilla Swap .

Arrears Swap Plain Vanilla Swap

, (Net Position)
Convexity Adjustment ( ).
,
Plain Vanilla Swap Arrears Swap
.
.

KIS PRICING,INC.

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9/31

April 25, 2003

KIS Weekly 12

Arrears Swap Convexity Adjustment 3

3 .

1.

Performance Arrears Swap Plain

Vanilla Swap .

2.

Plain Vanilla Swap (adjustment) .

3.

, (adjustment) Forward rate

.

[1] Difference in NPV (Arrears Plain-vanilla)

Yield curve

Arrears Swap Convexity adjustment , FRN FRN Plain

Vanilla Swap CMT SWAP . FRN
FRN Implied Forward Rate , FRN
Coupon Convexity Forward Rate
Coupon .

, Convexity Forward Rate forward rate(

( y ) ,

G( y)

G( y0 )

y0 ),

(-)

Forward Rate Implied Forward Rate .

1
G( y0 )
y0 y02 y2 t
2
G( y0 )

y0 : Forward Rate , y : Swaption , t :

G ( y ) : Coupon rate y% 3 5()

KIS PRICING,INC.

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10/31

April 25, 2003

KIS Weekly 12

II. FRN Convexity Adjustment

FRN , Swaption Convexity Adjustment

.

[1] FRN

2008-09-29

4.95%

2003 4 25

volatility = 0 Convexity Adjustment

( ), volatility 20%
Convexity Adjustment 34 . FRN
Convexity Adjustment FRN
.

Volatility = 0 %

Volatility = 10%

Volatility = 20%

CR(%)

CF

CR(%)

CF

vol = 0%
(bp)

CR(%)

CF

vol = 0%
(bp)

2003-06-29

4.95

123.8

4.95

123.8

0.0

4.95

123.8

0.0

2003-09-29

4.78

119.5

4.78

119.6

0.2

4.79

119.7

1.0

2003-12-29

4.82

120.4

4.82

120.5

0.4

4.83

120.8

1.6

2004-03-29

4.85

121.3

4.86

121.5

0.5

4.88

121.9

2.2

2004-06-29

4.89

122.3

4.90

122.5

0.7

4.92

123.0

2.8

2004-09-29

4.93

123.3

4.94

123.5

0.9

4.97

124.1

3.5

2004-12-29

4.97

124.3

4.98

124.5

1.0

5.01

125.3

4.1

2005-03-29

5.01

125.3

5.02

125.6

1.2

5.06

126.5

4.8

2005-06-29

5.05

126.2

5.06

126.5

1.4

5.10

127.6

5.5

10

2005-09-29

5.08

127.1

5.10

127.5

1.6

5.15

128.7

6.2

11

2005-12-29

5.12

128.1

5.14

128.6

1.7

5.19

129.9

7.0

12

2006-03-29

5.17

129.2

5.19

129.7

1.9

5.25

131.2

7.8

13

2006-06-29

5.18

129.4

5.20

129.9

2.1

5.26

131.5

8.5

14

2006-09-29

5.16

129.0

5.18

129.6

2.3

5.25

131.3

9.1

KIS PRICING,INC.

www.bond.co.kr

11/31

April 25, 2003

KIS Weekly 12

Volatility = 0 %

Volatility = 20%

CR(%)

CF

CR(%)

CF

vol = 0%
(bp)

CR(%)

CF

vol = 0%
(bp)

15

2006-12-29

5.14

128.4

5.16

129.1

2.4

5.23

130.9

9.7

16

2007-03-29

5.11

127.7

5.13

128.4

2.6

5.21

130.3

10.2

17

2007-06-29

5.13

128.2

5.16

128.9

2.7

5.24

130.9

10.9

18

2007-09-29

5.17

129.3

5.20

130.0

2.9

5.29

132.2

11.8

19

2007-12-29

5.22

130.4

5.25

131.2

3.2

5.34

133.6

12.7

20

2008-03-29

5.27

131.7

5.30

132.5

3.4

5.40

135.1

13.6

21

2008-06-29

5.27

131.8

5.31

132.7

3.6

5.42

135.4

14.3

22

2008-09-29

5.26

10131.5

5.30

10132.4

3.7

5.41

10135.2

14.9

10,097.6

8.45

10,123.0

33.8

Volatility = 10%

10,089.2

, Convexity Adjustment

.

KIS PRICING,INC.

www.bond.co.kr

12/31

April 25, 2003