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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.
Types of swaptions
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:
**N
Official source
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