A Review of CMS Swap Pricing Approaches

35 Pages Posted: 15 Jun 2016

Date Written: May 30, 2016


Evaluating Constant Maturity Swap (CMS) derivatives is a lot more complex than plain vanilla interest rate swaps, because of the unnatural schedule of their payments. Their pricing requires either a convexity adjustment or the use of a model. Hence multiple approaches have been proposed. We selected the most common ones in the marketplace, to analyse and compare them by examining their characteristics. We found that the most accurate prices are generated by Monte Carlo simulations with BGM model for forward rates, while the continuous swaption replication method offers prices consistent with the other instruments of the trading book.

Keywords: CMS, swap, pricing, cap, floor, swaption

JEL Classification: G1, G13

Suggested Citation

Decaudaveine, Marin, A Review of CMS Swap Pricing Approaches (May 30, 2016). Available at SSRN: https://ssrn.com/abstract=2794127 or http://dx.doi.org/10.2139/ssrn.2794127

Marin Decaudaveine (Contact Author)

Paris Dauphine University, Students ( email )

Place du Maréchal de Tassigny

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