CMS and CMS spread options

CMS analysis and risk management

  2 days
Course objectives

  • Master the evaluation techniques of CMS spread options

  • Master the CMS convexity adjustments

  • Analyse the risk of CMS and CMS spread options

Course content

CMS convexity adjustment

  • Why is the convexity adjustment needed?
    • The basic formula
    • Limitation
  • Smile replication method
    • SABR volatility smile
    • Replication method
  • Replication model limitation
    • Adjustments for far out of the money strikes
    • Swap settlement swaptions

Spread options

  • Black-Scholes formula for spread options
    • Normal rates
    • Log-normal rates
    • Smile impact on option prices
  • Use historical volatility or historical correlation?
  • Use implied correlation or historical correlation?
    • Implied correlation calculus
    • Historical correlation risk management limitation
    • Implied correlation risk management limitation
  • Digital spread options
  • Volatility smile
    • Copula method
    • Volatility smile impact

CMS spread exotic options

  • Different types of CMS spread exotic options
  • Evaluation models
  • Calibrate on which options

CMS spread risk management

  • Why do not standard risk management tools work?
  • Cross-gamma risk management



Oscar Relier

Oscar Relier

Oscar has worked in corporate finance and trading room for SBC Warburg, UBS and Deutsche Bank. He masters the mechanism, use and pricing of derivatives. Also trained in behavioral techniques, he designs and conducts training on public presentation and on the issues of communication and management.

Oscar Relier also teaches :