What Is a Constant Maturity Swap?

A fixed-term exchange rate is the interest rate differential between two fixed-term asset exchange rates. The two parties to the transaction exchange and settle interest on assets with different interest calculation methods in a specific cycle. The main type of exchange is the exchange of fixed and floating interest rates. ^[1]

Fixed-term exchange rate

Right!

A fixed-term exchange rate is the interest rate differential between two fixed-term asset exchange rates. The two parties to the transaction exchange and settle interest on assets with different interest calculation methods in a specific cycle. The main type of exchange is the exchange of fixed and floating interest rates. ^[1]

CMS has a fixed term of at least 1 year and a maximum of 30 years; it is a reference index for interest rates widely used in the market. In practice, the USD CMS quote corresponds to a 3-month LIBOR and the EUR CMS corresponds to a 6-month LIBOR. CMSn refers to the swap rate for a period of n years. For example: USD CMS30Y is a 30-year dollar

Suppose there is one in the country

Under the pressure of RMB appreciation and credit crunch, more and more enterprises have begun to favor financial derivatives such as CMS, and the transaction scale has also continued to rise. It is undeniable that CMS is indeed an efficient debt preservation product, which can match the bank's traditional RMB loan products and match existing loans of enterprises. When RMB faces interest rate hike, it avoids RMB Interest rate risk serves the purpose of reducing corporate loan costs and saving financial expenses. In addition, the biggest attraction for CMS-linked products is that their margin trading has a leverage effect. Enterprises can obtain relatively high returns without using a large amount of funds.

And from historical data, under normal circumstances, the long-term interest rate is higher than the short-term interest rate. Although there have been several upside-downs in the history of the US dollar CMS, the number of days at a time is very small, and the total is only a dozen days. From the birth of the euro to May 29, 2008, the 30-year fixed-term swap interest rate and the 2-year fixed-term swap interest rate have never experienced long-term or short-term interest rate inversion. From past data, this kind of interest rate derivative has a relatively low risk factor for the company.

Low risk does not mean that there is no risk. To reduce the cost of debt through CMS, the premise must be that the long-term interest rate must be higher than the short-term interest rate, and there will be no inversion. However, since February 2008, the 30-year and 2-year price trend of the Euro Fixed Term Swap Interest Rate (EUR CMS) has been relatively stalemate. On May 23, 2008, the real-time market price of EURCMS30-2 appeared less than zero, and the final price 0, and May 30, 2008 finally appeared upside down so far. As the inflation rate in the euro area continues to exceed the control limit of the European Central Bank, the rising interest rate expectations have led to the long-term and short-term interest rate inversion of the euro. Those who have purchased the euro CMS products are suffering huge economic losses.

CMS is a debt management product mainly targeted at some large domestic enterprises with liabilities overseas. This type of product contains two parts. On the one hand, the customer pays a certain fee to the bank, that is, a lower interest rate can be used to replace the high interest rate that actually needs to be paid; on the other hand, the bank conducts equal-value transactions with international investment banks or hedge funds To hedge their own risks. Throughout the transaction, the Chinese-funded bank only assumed the role of an intermediary and did not hold open positions, it just made a certain difference from them. The real hedging companies are those international investment banks.

At present, many domestic enterprises have not matured their concepts of investment and financial management, and they do not know enough about CMS-like derivatives launched in the market. Coupled with the market's blindly exaggerating the CMS's debt preservation function, the potential risks arising from upside down have been greatly weakened. The company was once blinded by the advantages of the CMS, ignoring that it was actually involved in complex and variable interest rate derivative transactions. When a loss occurs in the CMS, some companies cannot terminate the contract at all, and some companies can only reverse the flat with a bad price, and the company bears a certain risk of net loss.

In addition, the structure and pricing of CMS-linked products are relatively complicated. Banks often formulate corresponding product solutions based on the customer's risk tolerance and preferences. Therefore, companies have weaker bargaining power in the process. Another is that the plan does not change the original loan interest rate. If the RMB interest rate rises sharply, companies still fail to lock in interest rate risk.