A CMS floor is similar to a Floor in that it protects its buyer from a drop in a floating interest rate below the level (i.e., the strike) specified in the contract. The difference is that the floating interest rate is linked to a long-term swap rate rather than to a short term cash rate.
So for example, a CMS floor will allow a financial institution with investments linked to CMS rates to protect itself against a decrease in long term rates. Similar to any other floor, the buyer of the option will receive payments only for the periods when the relevant interest rate index is set below the strike.
In return for the protection it provides, the buyer of the CMS floor pays a premium to the seller. Expressed as a percentage of the notional, the premium is usually paid upfront.
Pricing a CMS Floor in SDX Interest Rates
Pricing a CMS floor in SDX Interest Rates is identical to pricing a vanilla floor (see Pricing a Floor in SDX Interest Rates) with the following exceptions:
At least one leg pays a floating rate based on a long-term rate.
Currently the premium can only be paid upfront.