cms spread payoff; closed form?

Discussion in 'Trading' started by newguy1, Jun 4, 2005.

  1. newguy1


    Hello everyone,

    I am thinking about a single forward payoff based on a CMS spread, say 20yr CMS - 2 yr CMS five years from now. There is no optionality, if the value goes negative the other party has to pay.
    I understand that forward swap rates are implied by the market discount curve, i.e. forward rate out of year t to year T is given by
    F(t, T) = (DF_t - DF_T) / (Q_T - Q_t),
    where Q_t = Sigma(DF_i Tau_i) with i over fixings from time 0 to time t and Tau_i being the tenors from times i-1 to i.
    So I can calculate both the implied F(5, 7) and the implied F(5, 25) and get some closed-form value for this payoff that way.
    If this is the wrong aproach, it would be great if someone could tell me why, what needs to be done instead and if there is anywhere I could read up on how this can be done.
  2. newguy1


    anyone know?

  3. newguy1


    No comments? Perhaps you guys could suggest another place/person to ask?