Pricing a Callable CMS Spread Note with F3
October 31, 2014

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. The coupons of such a structure depend on the slope of the yield curve; the Note would therefore be traded by parties who wish to take a view on future relative changes in different parts of the yield curve. The steeper the yield curve, the greater the coupon - giving rise to the term "steepener" for certain CMS spread instruments.

A typical CMS spread product may have coupons depending on CMS rates with different maturities and multiplicative factors. Rate margins, caps and floors are also common, as are embedded Bermudan-style call and/or put options. F3 has the capacity to price CMS spread notes with all these features. F3 can value some CMS Spread Notes in closed form and can use several rates models for Monte Carlo simulation where closed form pricing is not available or if Monte Carlo is preferred. Comprehensive risk is provided for all CMS Spread Notes with any of the above stated features.

» For more information or to request a demonstration of how F3 handles a callable CMS spread note, contact a FINCAD Representative.


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» For more information or a customized demonstration of the software, contact a FINCAD Representative.