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Swaps - Constant Maturity Swaps

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 course, 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.

  • OBJECTIVES

    On completion of this course, 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

  • COURSE OUTLINE

    Topic 1: Structure of a Constant Maturity Swap

    The Three Elements

    Variations to the Interest Rates

    An Alternate View

    Topic 2: Pricing a Constant Maturity Swap

    Revisiting the Inference Inc. Deal

    The Forward Spreads

    The CMS Spread Formula

    Inference Inc Deal – Calculating the CMS Spread

    Topic 3: Price Sensitivities

    Yield Curve Expectations

    Source of Sensitivity

    Parallel Shift Sensitivity

    Non-parallel Curve Shifts

    Factor Sensitivity

    Topic 4: Convexity Adjustments

    Need for Convexity Adjustment

    Parameters for Convexity Adjustment

    The Convexity Adjustment Formula

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    120 Minutes

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