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On Valuing Constant Maturity Swap Spread Derivatives

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DOI: 10.4236/jmf.2012.22020    6,701 Downloads   11,676 Views   Citations


Motivated by statistical tests on historical data that confirm the normal distribution assumption on the spreads between major constant maturity swap (CMS) indexes, we propose an easy-to-implement two-factor model for valuing CMS spread link instruments, in which each forward CMS spread rate is modeled as a Gaussian process under its relevant measure, and is related to the lognormal martingale process of a corresponding maturity forward LIBOR rate through a Brownian motion. An illustrating example is provided. Closed-form solutions for CMS spread options are derived.

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The authors declare no conflicts of interest.

Cite this paper

L. Tchuindjo, "On Valuing Constant Maturity Swap Spread Derivatives," Journal of Mathematical Finance, Vol. 2 No. 2, 2012, pp. 189-194. doi: 10.4236/jmf.2012.22020.


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