An option on a swap futures. This option replicates the European-style convention of an OTC option with exercise taking place only at expiration, and as such it provides market participants with the benefits of optionality and of central counterparty clearing. In addition to its risk management uses, this option can help investors and debt issuers to take on a wide range of strategies. For example, bank treasurers can use a swap futures option to place a cap or floor on medium- and long-term interest rate exposures with less basis risk than other exchange-listed options. Likewise, asset managers can participate in swap-related options deals, dodging whereby any restrictions on their use of OTC derivatives.
Swap futures contracts underlying such an option typically have maturities spanning 5 years, 7 years, 10 years, and 30 years.
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