Structured Derivative Notes & Swaps - Part 4
Options on constant maturity swaps (CMSs) are complex instruments - they are the CMS equivalent of a regular cap/floor and valuation requires a 'convexity adjustment' to volatility. The most popular type of CMS option, a spread option that references the difference between two different observed rates, adds yet another layer of difficulty.
This tutorial introduces the different types of CMS-related options and the complex valuation issues raised by these options. The tutorial describes the process that the market follows to price these CMS-related options. The tutorial also describes the market and performance of structured notes and the payoff relating to each option.
On completion of this tutorial, you will be able to:
- Identify the different types of CMS-related options and explain how they are used
- Describe how the pricing of the various CMS structures raises complex issues, and the nature of solutions required to value them
- Explain how the CMS notes/options perform as market values change
Topic 1: CMS Option – Pricing Issues
Topic 2: CMS Option – Related Structures
Topic 3: Typos of CMS Options