CMS: covering all bases

Simon Cedervall and Vladimir Piterbarg develop a new vanilla model that directly links constant maturity swap (CMS) and payment convexity in general payouts to volatilities of swaptions of all relevant tenors, as well as prices of CMS spread options, while carefully controlling for potential sources of arbitrage. The model also accounts for the stochastic Libor-overnight indexed swap basis

screen-numbers-flare

Constant maturity swap (CMS) convexity adjustments are driven by the covariance between the underlying swap rate, its associated annuity and the discount bond of the payment delay. This implicitly involves the volatility and correlations of rates of different tenors, and since there is a developed derivatives market in all these quantities (via caps, swaptions and CMS spread options, for instance), the size of the convexity adjustment can be linked to market-implied volatilities and correlations

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

Most read articles loading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here