Constant maturity swap
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A Constant maturity swap, also known as a CMS, is a swap that allows the purchaser to fix the duration (see Bond duration) 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.
An Interest Rates Swap where the interest rate on one leg is reset periodically but with reference to a market swap rate rather than LIBOR. The other leg of the swap is generally LIBOR but may be a fixed rate or potentially another Constant Maturity Rate. Constant Maturity Swaps can either be single currency or Cross Currency Swaps. The prime factor therefore for a Constant Maturity Swap is the shape of the forward implied yield curves. A single currency Constant Maturity Swap versus LIBOR is similar to a series of Differential Interest Rate Fix or DIRF in the same way that an Interest Rate Swap is similar to a series of Forward Rate Agreements.
[edit] Example
A customer believes that the difference between the six-month LIBOR rate will fall relative to the three-year swap rate for a given currency. To take advantage of this, he buys a constant maturity swap paying the 6mths libor rate and receiving the 3yr swap rate.
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