View source for Constant maturity swap

A '''constant maturity swap''' ('''CMS''') is a [[Swap_(finance)|swap]] that allows the purchaser to fix the [[Bond_duration|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.

A constant maturity swap is 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 swap]]s. Therefore, the prime factor for a constant maturity swap is the shape of the forward implied [[yield curve]]s. A single currency constant maturity swap versus LIBOR is similar to a series of [[Differential_Interest_Rate_Fix|differential interest rate fixes]] (or "DIRF") in the same way that an interest rate swap is similar to a series of [[Forward_rate_agreement|forward rate agreements]]. Valuation of constant maturity swaps depend on volatilities of different forward rates and therefore requires a stochastic yield curve model or some approximated methodology like a [[convexity correction|convexity adjustment]], see for example Brigo and Mercurio (2006).

== Example ==
A customer believes that the six-month [[LIBOR]] rate will fall relative to the three-year swap rate for a given currency. To take advantage of this curve steepening, he buys a constant maturity swap paying the six-month LIBOR rate and receiving the three-year swap rate.

==References==
*[[Damiano Brigo]] and [[Fabio Mercurio]] (2006). ''Interest-Rate Models: Theory and Practice - with Smile, Inflation and Credit'', Springer Verlag, 2nd ed. 2006.
*[https://ssrn.com/abstract=394201 Constant Maturity Swaps, Forward Measure and LIBOR Market Model], Dariusz Gatarek.

==External links==
* [http://db.riskwaters.com/public/showPage.html?page=356545 Interest Rate Exotics: The Gamma Trap ''Risk'' Magazine (2006), Navroz Patel]{{Dead link|date=November 2019 |bot=InternetArchiveBot |fix-attempted=yes }}


[[Category:Swaps (finance)]]


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