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Questions tagged [cms]

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10
votes
2answers
3k views

Why is the SABR volatility model not good at pricing a constant maturity swap (CMS)?

I have heard that the SABR volatility model was not good at pricing a constant maturity swap (CMS). How is that?
16
votes
1answer
12k views

What is the reason for the convexity adjustment when pricing a constant maturity swap (CMS)?

I'm trying to wrap my head around pricing a Constant Maturity Swap (CMS). Let's imagine the following deal: 6m LIBOR in one direction, 10y swap rate in the other. The discount curve is derived from ...