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What is CMS Spread Option Single Look? In what ways is it different from CMS Spread Cap/floor? Also, what's strike shift? What's its function in CMS spread options' pricing? Thanks.

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A single look CMS spread option is simply an option on the difference between the two forward CMS rates and a chosen strike $K$ on a single expiry date $t$. A CMS spread cap is then a strip of options and pays on each $t_i$ from $t_1$ to $t_n$. Both types are quoted by brokers such as Tullet. Both products allow the investor a view on the shape of the yield curve.

I'm not sure what you mean by strike shift though but I'll take a guess: Typically the pricing of such complex interest rate products (single or multi-look options) is done with a (Shifted) Libor Market Model (LMM), calibrated to both ATM swaptions of each tenor as well as the quoted, typically multi-look CMS spread options. Since the forward rates under LMM follow a log-normal distribution the market has been forced to apply a "shift" to accommodate for negative rates.

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  • $\begingroup$ I agree with the first part of @oronimbus answer. In my opinion, ‘strike shift’ is more likely to refer to digital cms spread options ( eg a contract where seller pays buyer a fixed amount if 10yr- 2yr cms > K). Seller might price this as a (K-s, K) call spread where s is a strike shift. This adjustment helps manage the delta of the trade near expiry and indeed may match the market price better than using no adjustment. $\endgroup$ – dm63 Jul 31 at 3:03

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