Risk glossary

A constant maturity swap is a type of interest rate swap in which one leg of the instrument references a swap rate with a set (or “constant”) maturity.

In a plain vanilla swap, users exchange fixed-rate payments for floating-rate payments. The fixed rate is known as the swap rate, and is calculated as equivalent to all the projected floating-rate payments over the life of the trade. Thus, the fixed rate of a 10-year swap is based on the 10-year swap rate.

In a constant maturity swap, this 10-year swap rate acts as the floating leg, and at each payment period the existing 10-year rate is used as the reference. The instrument enables users to hedge exposure to the swap rate, or to speculate on movements in the swap curve.

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