When pricing the CMS Spread Swap or the CMS Spread Option you must choose whether to use the flat correlation or the term structure correlation method. For more information on these methods see What Correlation Methods Are Available to Price a CMS Spread Option & CMS Spread Swap.
If you choose to use the term structure correlation method, then the correlation curve between the two underlying indexes (or data series) is taken into account.
You can see the index correlation data in the instrument’s Correlation Curve window. This window is accessed by clicking the Correlation Term Structure button (either in the Single Option page or in the Single Option Data window).
By default it is:
Calculated using the data saved for each index in the historical database.
By default this consists of snapshots of data taken daily at 12 am London time. However, if you have customized the currency’s cut-off time (see Customizing the Market Rates Cut-off Time per Currency for Historical Pricing) then it consists of snapshots of data taken daily at the customized cut-off time.
Calibrated to use real interbank trading prices. These prices are the best reflection of the true mid-market that is possible because this is where large dealers transfer risk with each other in the broker market.
Once the correlation data for the underlying indexes is displayed, you can then edit the data as necessary.
After making any changes, you can then tell the system to freeze the rates, that is, to use the edited rates until further notification. You do this by clicking the Accept button. The frozen rates are then used in the pricing pages to price any instrument based on these two indexes until one of the following events happens:
The current session ends.
In the pricing page you click the Refresh button or the Refresh Rates button.
If you edit this data it will subsequently affect the calculation of the Correlation Exposure result.
To edit the correlation data for a CMS spread swap or a CMS spread option:
| 1. | In the Single Option page enter a CMS spread swap or a CMS spread option. |
| 2. | Define the two indexes as relevant. |
| 3. | Click the Correlation Term Structure button. The Correlation Curve window is displayed. |
| 4. | Edit the correlations as required. Any edited value is highlighted in blue. |
| 5. | Click Accept and then OK. The changes are saved and the Correlation Curve window closes. |