An option on an interest rate swap. It grants the holder the right, without the obligation, to enter into an interest rate swap at a future date. The swap rate is the strike rate for the option, whilst the counterparties should agree on the swap term (swap tenor), time to expiration, and the swap rate. Interest rate swaptions are generally of two types: a pay fixed swaption (a payer’s swaption) and a receive fixed swaption (a receiver’s swaption). Like ordinary options, interest rate swaptions, also, are classified as European interest rate swaptions and American interest rate swaptions. For example, with a European receiver’s swaption in which the strike price is 5.5%, the swap term is 3 years, and the option expires after one year, the buyer has the right at expiration date to enter into a 3 year interest rate swap in which he receives a swap rate of 5.5% and pays the reference rate.
Interest rate swaptions belong to the broader class of interest rate derivatives.
Comments