Financial Risk Manager Part 1
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A risk manager is evaluating the price sensitivity of an investment-grade callable bond using the firm's valuation system. The table below presents information on the bond as well as on the embedded option. The current interest rate environment is flat at 5%.
| Interest Rate Level | Callable Bond | Call Option |
|---|---|---|
| 4.98% | 102.07848 | 2.0871 |
| 5.00% | 101.61158 | 2.0501 |
| 5.02% | 100.92189 | 2.0131 |
The convexity of the callable bond can be estimated as: