Interest Rate Swaps
Interest Rate Caps, Floors
Futures and Forward
A swaption is an option
on an interest rate swap. The buyer, for a premium, purchases the right, but
not the obligation, to enter into a swap agreement at a specific future
date, set strike rate, notional amount, amortization schedule, term, and
settlement date. The agreement can either exchange fix rate interest for
floating rate interest, or floating rate interest for fixed rate interest.
A payer swaption is where the buyer pays the fixed rate interest and
receives the floating rate interest. A receiver swaption is where
the buyer receives the fixed rate interest and pays the floating rate
There are three types of
swaptions, as follows:
- American swaptions
- The buyer can exercise the
option any time during the option period.
- European swaptions
– The buyer can only exercise
the option on its maturity date.
- Bermudan swaptions
– The buyer has specified dates
during the option period where the option can be exercised.
As with any option, if
the swaption is not exercised, it expires worthless.