CMS replication
Posted: December 29th, 2010, 6:24 pm
not sure exactly what your question is, nevertheless, you can take a cms caplet at K to be a portfolio of payers with most of notionals concentrated at K, and a CMS cap as a bunch of these. From then on you can apply your understanding of BS to figure out the gamma exposure - like , all things equal, gamma will be larger for a caplet if the 10y fwd for that caplet is near K, and also all things equal, gamma will be larger for near expiry caplets.