For interest transactions with a variable component (swaps, caps, floors, floating rate notes) with a reference interest term different from the period term for which the interest to be determined is to be applied, an adjustment must be made when calculating the corresponding forward interest rate. Examples of such transactions are constant maturity swaps (swaps, which using a fixed rate, pay that rate every 6 months for, e.g. 10 year bonds).

Input parameters:

• Current date

• Valuation date

• Fixing date, date of interest fixing

• Reference rate description

• Unadjusted forward rate

• Term of reference rate in days

• The volatility to be used for the adjustment (can be left empty, in which case it is provided in the module (volatility of the reference rate for the period from valuation to fixing)).

For calculating the adjustment you must determine the convexity and modified duration of a bond that has the same term as the reference rate.

For this you must first determine the term of the reference rate in years.

Then you create a fictitious bond with the same term and year-round interest payments at the forward interest rate level.

For this, using the differential quotient, you calculate the modified duration and convexity.

Finally, you calculate the adjustment with the following formula.