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?
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A good place to start is Hagan's paper Convexity Conundrum ...available on the web.
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$\begingroup$ @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 $\endgroup$ Nov 21 '11 at 8:44
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