A constant maturity credit default swap (CMCDS) in which the rate is capped at a specific level. This swap combines an interest rate cap with a CMCDS. The value of the underlying cap can be viewed as a portfolio of payer credit swaptions struck at the level of the cap and with maturities coinciding with the reset dates. The value of these swaptions (swap options) is translated into a higher participation rate for capped CMCDSs compared with uncapped ones.
December 16, 2024
