How do you replicate the payoff of a constant maturity swap rate?

That is, if the payoff of a contract pays the 5-year swap rate every year for 10 years, how would you replicate this payoff using swaptions?


A good place to start is Hagan's paper Convexity Conundrum ...available on the web.

| improve this answer | |
  • $\begingroup$ @kmcoy : beside my answer I think that you should ask more precise questions once you have read this paper where the static no arbitrage hedging procedure is clearly exposed. Best regards $\endgroup$ – TheBridge Nov 21 '11 at 8:44

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.