What is a range accrual swap?
What is a range accrual swap?
A range accrual swap is a swap in which one leg pays an accrual coupon and the other leg is a standard floating leg. A callable range accrual swap is an accrual swap which gives the party paying the accrual coupon the right to cancel (or call back) the swap on any coupon date after the initial lock-out period.
What is a range accrual note?
A Range Accrual Note (RAN) is a structured product typically issued by a financial institution such as a bank. The payoffs from such a note are more complex than those for a plain-vanilla fixed income product, all else equal. The reference indices for range accrual products can vary.
What is a constant maturity swap rate?
A constant maturity swap (CMS) is a variation of the regular interest rate swap in which the floating portion of the swap is reset periodically against the rate of a fixed maturity instrument, such as a Treasury note, with a longer maturity than the length of the reset period.
What is CMS curve?
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 a constant maturity swap fixes against a point on the swap curve on a periodic basis.
What is the CMS rate?
A constant maturity swap (CMS) is a type of interest rate swap. In a “plain vanilla” interest rate swap one party periodically pays cash flows equal to a pre-determined fixed rate on a notional principal to a counterparty for the duration of the contract.
What is a CMS spread?
A constant maturity swap (CMS) spread note is a derivative with a payoff based on the difference of two swap rates of specific maturities. For example, a CMS spread note might pay quarterly coupons based on the difference between quarterly fixings of the 10-year and 5-year semi-annual swap rates.
How does a constant maturity swap ( CMS ) work?
A constant maturity swap (CMS) is a variation of the regular interest rate swap in which the floating portion of the swap is reset periodically against the rate of a fixed maturity instrument, such as a Treasury note, with a longer maturity than the length of the reset period.
How to calculate CMS spread in closed form?
Closed-form solutions for CMS spread options can be obtained only in rare cases, such as the case of caplets and floorlets with zero strike in which Margrabe [5] exchange option formula can be used. Our approach is to model the CMS spread rate directly with a distribution that allows for both positive and nega- tive values in its range.
What does a CMS spread Caplet do at maturity?
A CMS spread caplet (floorlet) is a call (put) option on a CMS spread rate. At maturity the buyer receives a payment from the seller if the CMS spread was above (below) the agreed strike rate. CMS spread caplets (floorlets) are not gener- ally traded.
How are constant maturity swaps used for hedging?
Constant maturity swaps are exposed to changes in long-term interest rate movements, which can be used for hedging or as a bet on the direction of rates. Although published swap rates are often used as constant maturity rates, the most popular constant maturity rates are yields on two-year to five-year sovereign debt.