What is convexity adjustment?

What is convexity adjustment?

Approach: Explain adjustment needed when expectation under forward measure differs from forward rate.

Adjustment to forward rate to account for convexity effect due to Jensen's inequality. For example, futures rate > forward rate for bonds because of correlation between rates and discounting.

Follow-up: Compute adjustment for Eurodollar futures.

Key concepts: jensen's inequality, forward measure, interest rate derivatives.