A non-standard interest rate cap in which the rate used is a swap rate with a constant maturity. For example, a CMS cap could put a ceiling on a 5-year swap rate. CMS caps are useful instruments for investors willing to hedge positions in long-term interest rates on expectation the rates will go up faster than the yield curve predicts. Like a normal interest rate cap (vanilla cap), which consists of a series of caplets, a CMS cap can also be viewed as a set of CMS caplets.
December 16, 2024
