Constant Maturity Swaps, Forward Measure and LIBOR Market Model
Deloitte & Touche CE
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.
Number of Pages in PDF File: 8
Keywords: Constant maturity swaps, forward measure, LIBOR market model
Date posted: May 14, 2003