2006 NAST MANAGEMENT CONFERENCE

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2006 NAST MANAGEMENT CONFERENCE
A Presentation to

• Navigating the Flat Yield Curve
• December 4, 2006

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Constant Maturity Swap

• A Constant Maturity Swap (CMS) is a swap
  structure that acts upon the historically flat
  yield curve.
• Traditionally, yield curves are upward sloping,
  as reflected by the 10-year averages of the LIBOR
  swap curve.
• 1-month 3.97
• 5-year 5.21
• 10-year 5.65
• 30-year 6.01
• Currently, yield curves are flat to inverted, as
  reflected by the current LIBOR swap curve.
• 1-month 5.32
• 5-year 4.90
• 10-year 4.98
• 30-year 5.11

Reflects market conditions as of November 28,
2006 Source Bloomberg Information Systems
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Constant Maturity Swap LIBOR Example
Ratio of 1 Month LIBOR to 5-year LIBOR since
1/1/901
1 Reflects market conditions as of November 28,
2006 (Source Bloomberg Information Systems) 2
Based on a 20-year bullet structure
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Constant Maturity Swap LIBOR Example
Difference in basis points between 94 of 5-year
LIBOR and 100 of 1-Month LIBOR since 1/1/901
Maximum carry 287 bps
Average carry 112 bps
Minimum carry (40) bps
1 Reflects market conditions as of November 28,
2006 Chart demonstrates the difference between
the 6-month trailing average of 94 of 5-Year
LIBOR and the 6-month trailing average of 100 of
1-Month LIBOR Source Bloomberg Information
Systems
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Constant Maturity Swap Structures
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Constant Maturity Swap Beware the BMA to LIBOR
swap
IS ACTUALLY.
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Observations

• There are many structures for a CMS
• Indices BMA vs LIBOR
• Short-leg 1-Month vs 6-Month
• Long-leg 5-Year vs 10-Year

• Risks
• Traditional Swap Risks Counterparty Risk,
  Termination Risk, etc
• Curve Risk The risk of a prolonged flat or
  inverted yield curve

• Parting Thoughts
• Check your swap policy
• Consider delaying the start of your CMS
• Consider long reset periods
• Consider the applicability for POBs
• Monetization