Jensen’s Inequality
1. Context
In this short video from FRM Part 2 curriculum, we explore the Jensen’s Inequality and what it implies for linear, convex and concave functions. We use expected values of a forward, a zero-coupon bond and a log contract to explore and understand how expected value of a function of a random variable compares with the function evaluated at the expected value of the random variable. The details of the reading in which this topic appears are given below:
| Area | Market Risk |
| Reading | The Evolution of Short Rates and the Shape of the Term Structure |
| Reference | Bruce Tuckman and Angel Serrat, Chapter 8. The Evolution of Short Rates and the Shape of the Term Structure In Fixed Income Securities, 3rd Edition, (Hoboken, NJ: John Wiley & Sons, 2011). |