Swap option concept
A swaption, also known as a swap swap option concept, refers to an option to enter into an interest rate swap or some other type of swap.
In exchange for an options premiumthe buyer gains the right but not the obligation to enter into a specified swap agreement with the issuer on a specified future date. A receiver swaption is the opposite i.
Swaptions are over-the-counter contracts and are not standardized, like equity options or futures contracts. Beyond these terms, the buyer and seller must also agree whether the swaption style will be Bermudan, European or American. These style names have nothing to do with geography; instead referring to the methodology in which the swaption will be executed.
Key Takeaways Bermudan swaption: the purchaser is allowed to exercise the option and enter into the specified swap on a predetermined set of specific dates. American swaption: the purchaser can exercise the option and enter into the swap on any day between the origination of the swap and the expiration trading is evil. There may be a short lockout period after origination.
Large corporations also participate in the swaption market to help manage interest rate risk. Swap contracts are offered in most of the major world currencies, including the U. Commercial banks are generally the main market makers because the immense technological and human capital required to monitor and maintain a portfolio of swaptions is usually out of the reach of smaller-sized firms.