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FINANCIAL MARKET COURSES

CMS Option Structures

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 course introduces the different types of CMS-related options and the complex valuation issues raised by these options. The course describes the process that the market follows to price these CMS-related options. The course also describes the market and performance of structured notes and the payoff relating to each option.

  • OBJECTIVES

    On completion of this course, 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

  • COURSE OUTLINE

    Topic 1: CMS Option – Pricing Issues

    Modelling Future Yield Curves

    Complex Interest Rate Models

    Market Models

    Valuation of Spread Options

    Problems with Correct Valuation

    LMM & Monte Carlo Simulation – Bermudas

    Topic 2: CMS Option – Related Structures

    Steepening Trades

    Ranges Accrual Notes

    Variations in CMS Option Structures

    CMS Option-Related Structures – Performance

    Call Feature & Volatility

    Topic 3: Typos of CMS Options

    CMS Options

    o CMS Swaption

    o CMS Swaption Terminology

    o CMS Swaptions – Underlying Assets

    o At-The-Money ( ATM) CMS Swaption

    o CMS Spreads Between Rates

    o Simple Fixed/ Floating CMS Swaption

    o CMS Cap/ Floor

    o CMS Cap/ Floor- Pricing

    o Minimum Coupon- Embedded Option

    o CMS Spread Option

    o CMS Spread Cap/Floor

    o CMS Spread Swaption

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    90 Minutes

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