# FRM vs CFA convexity

I am doing the 2018 GARP practice exam and convexity estimation is given by the formula [(P-) -2(P0) + (P+)] / (P0) * Δy2.

However, in the CFA curriculum, the denominator of the formula is 2*(P0) * Δy2.

Which one is correct?

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The formula for convexity is controversial.

Hatfields & McCoys controversial.

Some think that the “2” belongs in the denominator for the convexity calculation, and that the formula for using it should be:

%ΔP ≈ Dureff × Δy + Conveff × (Δy)2

Others think that the “2” does not belong in the denominator for the convexity calculation, and that the formula for using it should be:

%ΔP ≈ Dureff × Δy + ½Conveff × (Δy)2

Both formulations appear in the literature.

Sorry.

Simplify the complicated side; don't complify the simplicated side.

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Got back here after seeing David Herper’s (BT) post.

This is my take.
I think from mathematical standpoint FRM is correct, however from intuitive understanding let’s say If I try to understand Convexity impact for 1BP change the natural inclination would be to adjust Convexity*(1BP)2 than 1/2*Convexity*(1BP)2

a typical tussle between mathematicians and finance experts. :D

Conclusion: Do as per your respective exams

Edit: I just checked in CFA LI & LII old book, in the denominator there is NO 2 in convexity formula

Magina, the Antimage II Never ever give up!!

Deal_Clincher wrote:
Edit: I just checked in CFA LI & LII old book, in the denominator there is NO 2 in convexity formula

That’s a recent change: last couple of years.

Historically, the 2 has been in the formula, probably because that’s how it appears on Fabozzi.

Simplify the complicated side; don't complify the simplicated side.

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