Constant maturity swap
From Wikipedia, the free encyclopedia
A constant maturity swap, also known as a CMS, is a swap that allows the purchaser to fix the 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 rate 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 six-month LIBOR rate and receiving the three-year swap rate.
[edit] External links
|
||||||||||||||
