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Volatility dealers’ conundrum

Margins on dollar-denominated swaptions and constant maturity swaps have narrowed sharply. This is great for clients, but dealers are caught in a bind. Gallagher Polyn asks why

Margins on dollar-denominated swaptions and constant maturity swaps (CMS) have collapsed in the past two years. According to one prominent dealer, three years ago, on a CMS or swaption trade with a one-volatility-point bid-ask spread, a dealer earned about a quarter of a volatility point; 18 months ago, that had halved. Today, dealers earn no volatility on many trades.

Dealers and their clients

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