Both CMS (Constant Maturity Swap) and LIBOR-in-arrears swaps have payments that are linear with respect to an index while the offsetting hedges are convex. The linearity of the payment (relative to the convex hedges) imposes a cost that requires a “convexity adjustment” applied to the linear payment. This note lays out a practical method for calculating the value of the convexity adjustment.
This paper was published in Derivatives Quarterly, Winter 1995. A copy, as a 15-page .pdf, is available on the CloseMountain site
A three-page summary outlines the “convexity adjustment” applied to constant maturity swaps. Published in Derivatives Weekly August 28th 1995, a copy is available here on the CloseMountain site