# Convexity Adjustment

*Quant & Pricing — Finicade finance glossary*

A convexity adjustment corrects for the fact that a non-linear payoff's expected value is not the value at the expected rate. The classic case is interest rate futures versus forwards: daily settlement means a futures holder profits when rates rise and reinvests at the higher rate, so futures rates sit above forward rates. Ignoring the adjustment misprices long-dated positions by a visible number of basis points.

**Also known as:** convexity correction, futures convexity adjustment

**Related terms:** [Convexity](https://finicade.com/glossary/convexity), [Forward Rate](https://finicade.com/glossary/forward-rate), [Futures Contract](https://finicade.com/glossary/futures-contract), [Daily Settlement](https://finicade.com/glossary/daily-settlement)

Source: https://finicade.com/glossary/convexity-adjustment