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Constant maturity treasury derivative
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Over-the-counter swaps and options which use longer-term, Treasury-based instruments for their floating rate reference than Money Market indexes, such as Libor.‘Constant Maturity Treasury’ (CMT) refers to the Par Yield that would be paid by a treasury bill, note or Bond which matures in exactly one, two, three, five, seven, 10, 20 or 30 years. Since there may not be treasury issues in the market with exactly these maturities, the Yield is interpolated from the yields on Treasuries that are available. In the US, such rates have been calculated and published by the Federal Reserve Bank of New York and the US Treasury department on a daily Basis every day for more than 30 years. The H.15 Report from the Federal Reserve Bank is often used as a source for CMT rates. It is then possible for this interpolated Yield to form the index rate for instruments such as floating rate Notes, which pay Interest linked to the CMT Yield, options, which pay the difference between a Strike Price and the CMT Yield, and swaps and swaptions, in which one of the cashflows exchanged is the CMT Yield. Where necessary, the reference rate is reset at each settlement date. Typical uses of CMT derivatives as Hedging tools include the purchase of CMT floors by mortgage servicing companies to protect the value of purchased mortgage servicing portfolios, and the purchase of CMT caps to protect investors with negatively convex mortgage-backed securities portfolios. It is possible to enter into derivatives in other currencies that are based, by analogy, on a ‘constant maturity Interest rate Swap’ interpolated from the Swap curve in the relevant Currency. Such derivatives are known as constant maturity Swap (CMS) derivatives. Unlike CMT derivatives, CMS derivatives incorporate the spread component of swaps.
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Privatebanking.com
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