Constant maturity swap

A constant maturity swap, also known as a CMS, is a

of received flows on a swap.

The floating leg of an interest rate swap typically resets against a published index. The floating leg of a constant maturity swap fixes against a point on the swap curve on a periodic basis.

A constant maturity swap is an interest rate swap where the interest rate on one leg is reset periodically, but with reference to a market swap rate rather than

, see for example Brigo and Mercurio (2006).

Example

A customer believes that the six-month

rate will fall relative to the three-year swap rate for a given currency. To take advantage of this curve steepening, he buys a constant maturity swap paying the six-month LIBOR rate and receiving the three-year swap rate.

References

• Damiano Brigo and Fabio Mercurio (2006). Interest-Rate Models: Theory and Practice - with Smile, Inflation and Credit, Springer Verlag, 2nd ed. 2006.
• Constant Maturity Swaps, Forward Measure and LIBOR Market Model, Dariusz Gatarek.

External links

• Interest Rate Exotics: The Gamma Trap Risk Magazine (2006), Navroz Patel^{[permanent dead link]}