Are you an EPFL student looking for a semester project?
Work with us on data science and visualisation projects, and deploy your project as an app on top of Graph Search.
Concept
Swaption
Summary
A swaption is an option granting its owner the right but not the obligation to enter into an underlying swap. Although options can be traded on a variety of swaps, the term "swaption" typically refers to options on interest rate swaps.
There are two types of swaption contracts (analogous to put and call options):
A payer swaption gives the owner of the swaption the right to enter into a swap where they pay the fixed leg and receive the floating leg.
A receiver swaption gives the owner of the swaption the right to enter into a swap in which they will receive the fixed leg, and pay the floating leg.
In addition, a "straddle" refers to a combination of a receiver and a payer option on the same underlying swap.
The buyer and seller of the swaption agree on:
The premium (price) of the swaption
Length of the option period (which usually ends two business days prior to the start date of the underlying swap),
The terms of the underlying swap, including:
Notional amount (with amortization amounts, if any)
The fixed rate (which equals the strike of the swaption) and payment frequency for the fixed leg
The frequency of observation for the floating leg of the swap (for example, 3 month Libor paid quarterly)
There are two possible settlement conventions. Swaptions can be settled physically (i.e., at expiry the swap is entered between the two parties) or cash-settled, where the value of the swap at expiry is paid according to a market-standard formula.
The participants in the swaption market are predominantly large corporations, banks, financial institutions and hedge funds. End users such as corporations and banks typically use swaptions to manage interest rate risk arising from their core business or from their financing arrangements. For example, a corporation wanting protection from rising interest rates might buy a payer swaption. A bank that holds a mortgage portfolio might buy a receiver swaption to protect against lower interest rates that might lead to early prepayment of the mortgages.
Official source
About this result
This page is automatically generated and may contain information that is not correct, complete, up-to-date, or relevant to your search query. The same applies to every other page on this website. Please make sure to verify the information with EPFL's official sources.