CMS SPREAD OPTIONS

S. GALLUCCIO*, and O. SCAILLET**

*BNP PARIBAS London **HEC Geneve and Swiss Finance Institute

 

Abstract

We study the pricing of Constant Maturity Swap spread options. We first discuss pricing without taking into account the presence of smiles before examining pricing with their inclusion. Further we look at the notions of implied correlation and implied normal spread volatility.

Keywords: Swap rates, Interest rate derivatives, Option pricing.