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Derivatives

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  • September 17, 2020
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CMS Spread Option

A spread option (an interest rate derivative) that pays a coupon based on the differential between the CMS rate over two different maturities against a funding rate. For example, the holder may receive 6% in year one, and a fixed coupon in proportion to the number of business days the spread (between 30-year CMS and 10-year CMS) remains above 0.5% out of the total number of business days within the period. For this right, the holder pays, say, LIBOR minus 20 basis points.

This spread option is also known as a callable spread option.


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