JMF  Vol.2 No.2 , May 2012
On Valuing Constant Maturity Swap Spread Derivatives
Abstract: 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.
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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