Interest Rate & Currency Swap Structures - Part 4
Constant maturity swaps (CMS), a variation of interest rate swaps, are relatively new in the derivatives market. The basic CMS structure offers the exchange of two floating rate coupon streams, one based on a par swap rate or government bond yield and the other based on a short-term rate (such as Libor). These instruments are an ideal product for investors looking to take a view on the shape of the implied forward curve.
In this tutorial, we describe the structure of constant maturity swaps and explain how these instruments are priced. Concepts related to their pricing, such as sensitivities and convexity adjustments, are also included.
On completion of this tutorial, you will be able to:
- Identify opportunities to use constant maturity swaps profitably
- Target market conditions that make constant maturity swaps an ideal client product
- Identify the important sources of mark-to-market sensitivity for constant maturity swaps
- Apply convexity adjustments while pricing constant maturity swaps
Topic 1: Structure of a Constant Maturity Swap
Topic 2: Pricing a Constant Maturity Swap
Topic 3: Price Sensitivities
Topic 4: Convexity Adjustments