1.3 Swaptions

This topic describes the swaptions feature available in the OT module.

A swaption gives the buyer an option to enter into an interest rate swap deal at a future date at a pre-agreed price.

Below are the list of swaption:

Table 1-1 Types of Swaptions

Swaption	Description
Payer’s Swaption	A payer’s swaption gives the buyer of the option the right, but not the obligation, to pay a fixed rate and receive the floating interest rate in a swap contract. A swaption gives the holder the benefit of the agreed strike rate (fixed rate) if the prevailing market swap rate (fixed rate to be paid for receiving same benchmark floating rate) is higher while giving her the flexibility to enter into the prevailing market swap rate (fixed rate to be paid) if it is lower than the strike rate.
Receiver’s Swaption	A receiver’s swaption gives the buyer of the option the right, but not the obligation, to receive a fixed rate and pay the floating interest rate in a swap contract. This benefits the holder if the prevailing market swap rate (fixed rate to be received against the same benchmark floating rate to be paid) is lower than the strike rate – in this scenario, the holder can exercise the swaption and enter into a swap whereby she receives the strike rate as the fixed rate. If the reverse happens, she can not exercise the swaption and enter into a swap at the prevailing market swap rate.

A swaption is settled in either of the following ways:

• Physically Settled, where the counterparties are obliged to enter into an interest rate swap deal on exercise of the swaption.
• Cash Settled, where the counterparties are only expected to exchange money on exercise of the swaption.