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How CMS Spread Option Strikes Are Quoted Relative to ATM

Article Quant Q&A · Author: Bond007
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Summary

The document raises a convention question about CMS spread options: whether market strikes are stated as absolute levels or relative to at-the-money. It points to two academic works that use different terminology, and asks which convention applies in practice. The author connects the choice to static replication of CMS rates, indicating that strike interpretation matters for how the payoff is represented and priced.

No answer or market evidence is included, so the document does not establish which convention is standard or explain how the two formulations relate. It is best read as a narrowly framed research question rather than a pricing method. Resolving it would require checking product definitions and market documentation, as well as the specific modeling and replication setup; terminology in the cited papers alone may not establish a universal convention.

Key ideas

  • The question is whether CMS spread option strikes are quoted as absolute levels or relative to at-the-money.
  • The author observes that two referenced academic works appear to use different conventions.
  • Strike interpretation is identified as relevant to static replication of CMS rates.
  • The document provides no response or market evidence establishing a standard convention.

Tags

OptionsFixed incomeDerivatives pricing
Full text
# Absolute or relative strikes?


# Absolute or relative strikes?












World,

When pricing a CMS Spread Option the market practice consider the strike as relative to ATM or Absolute?

If I relate to the following paper page 70 the author refers to absolute strike

[1] Dhamo,E., On the Calibration of the SABR–Libor Market Model Correlations, University of Oxford, 2011

http://www1.maths.ox.ac.uk/system/files/legacy/12804/Dhamo_diss_sub_30.9.11_11.49_AMENDED_VERSION_FOR_PUBLISHING_add_note_to_that_effect.pdf

Alternatively the following author refers to them as relative page 20 2 Wong,M-K., A Correlation-sensitive Calibration of a Stochastic Volatility LIBOR Market Model, University of Oxford

http://eprints.maths.ox.ac.uk/1384/1/Man_Kuan_Wong_dissertation.pdf

This topic has necessarily an impact on the static replication of cms rates.

Any relevant idea?

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.