A swaption (swap option) that can only be exercised on one day at the end of the option‘s life. This is typically two days for a spot starting swap to allow for the LIBOR (or generally a floating rate) to reset. It is possible that this type of swaption spends most or all of its life in a profit position (i.e., in the money) and just turns out of the money on its exercise date. This feature (exercisability on a single date) makes a European-style swaption riskier than its counterparty (American-style swaption). However, the holder can resell his swaption to the original seller or to a third party.
Most swaptions are written European-style.
Comments