Constant Maturity Swaps, Forward Measure and LIBOR Market Model

8 Pages Posted: 14 May 2003  

Dariusz Gatarek

Deloitte & Touche CE

Abstract

Constant maturity swaps can be regarded as generalizations of vanilla interest rate swaps. In a vanilla swap one exchanges the fixed swap rate against a floating LIBOR, which involves an interest rate relevant for that particular settlement period only. In a CMS swap this will be generalized. One will exchange the fixed legs against floating legs - usually the swap rate.

In this note we give a new (for our knowledge) approximate formula for convexity adjustment based on forward measure approach and LIBOR market model. This link is interesting itself - showing that convexity adjustment is model and calibration dependent.

Keywords: Constant maturity swaps, forward measure, LIBOR market model

Suggested Citation

Gatarek, Dariusz, Constant Maturity Swaps, Forward Measure and LIBOR Market Model. Available at SSRN: https://ssrn.com/abstract=394201 or http://dx.doi.org/10.2139/ssrn.394201

Dariusz Gatarek (Contact Author)

Deloitte & Touche CE ( email )

Fredry 6
Warsaw, 00-097
Poland

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