Constant maturity swap
A constant maturity swap is like a special kind of trading game between two people who want to make a deal. Imagine you and your friend both love candy, but you have different favorite types. You really love gummy bears and your friend really loves lollipops.
Now imagine you want to trade your gummy bears for your friend’s lollipops, but you’re worried that the value of your gummy bears might change in the future. For example, maybe next week, a new gummy bear factory will open up and start making way more gummy bears than before. That could make the value of your gummy bears go down, and you wouldn’t want that to happen!
So you and your friend come up with a special kind of deal called a constant maturity swap. You both agree that you’ll start trading gummy bears for lollipops, but you’ll only trade them at a set price that you both agree on. Let’s say you agree to trade one gummy bear for one lollipop every week, no matter what.
This means that even if the value of gummy bears goes down next week, you’re still guaranteed to get one lollipop for every gummy bear you trade. And even if the value of lollipops goes down next week, your friend is still guaranteed to get one gummy bear for every lollipop they trade. That way, you both get to trade the candy you like without worrying about any changes in value.
In real life, constant maturity swaps work similarly but instead of candy, people are trading financial assets like interest rates on loans or bonds. Just like with candy, the value of these assets can change over time, so people may use constant maturity swaps to lock in a fixed price for those assets over a certain period of time.
Now imagine you want to trade your gummy bears for your friend’s lollipops, but you’re worried that the value of your gummy bears might change in the future. For example, maybe next week, a new gummy bear factory will open up and start making way more gummy bears than before. That could make the value of your gummy bears go down, and you wouldn’t want that to happen!
So you and your friend come up with a special kind of deal called a constant maturity swap. You both agree that you’ll start trading gummy bears for lollipops, but you’ll only trade them at a set price that you both agree on. Let’s say you agree to trade one gummy bear for one lollipop every week, no matter what.
This means that even if the value of gummy bears goes down next week, you’re still guaranteed to get one lollipop for every gummy bear you trade. And even if the value of lollipops goes down next week, your friend is still guaranteed to get one gummy bear for every lollipop they trade. That way, you both get to trade the candy you like without worrying about any changes in value.
In real life, constant maturity swaps work similarly but instead of candy, people are trading financial assets like interest rates on loans or bonds. Just like with candy, the value of these assets can change over time, so people may use constant maturity swaps to lock in a fixed price for those assets over a certain period of time.