Extendable Swap

What Is an Extendable Swap?

An extendable swap has an embedded option that permits either party to broaden the tenor (maturity) of that swap, on determined dates, past its original expiration date.

Figuring out Extendable Swaps

The embedded option in an extendable swap can be tailored to either the fixed or floating party, yet is, normally, used by the fixed price payer. Something contrary to an extendable swap is a cancelable, or callable swap, which gives one counterparty the right to early end the agreement.

In the event that a trader sells an extendable swap and the fixed price payer chooses to exercise their option to broaden the swap, the swap seller must keep on paying the floating price previously agreed upon, which will probably bring about a swap with less positive terms than with a plain vanilla fixed-for-floating swap at the hour of the extension.

An extendable swap is valuable for swaps including commodities. The fixed price payer could wish to exercise their right to broaden the swap if the underlying security's price is rising, since the fixed price payer will benefit from continuing to pay a fixed price below market levels, while simultaneously getting a floating price relating to the higher market price.

Fixed price payers, since they can benefit from this feature, are probably going to pay a premium for an extension option, generally by paying a higher initial fixed price than they in any case would pay for a plain vanilla swap.

The risks implied with extendable swaps come in two principal forms. The initial segment of an extendable swap is essentially a swap agreement, and will therefore imply the risks and qualities associated with a plain vanilla swap with comparable terms. In any case, an extendable swap additionally characteristically contains an option to go into another swap (the extension), and therefore implies similar risks and attributes as swaptions.

Extendable Swaps and Swaptions

A swaption is a option that gives one party the right, however not the obligation, to go into a particular swap at an agreed-upon fixed price on, or before, the predefined expiration date or dates.

In a "pay-fixed" swaption, the holder of the swaption has the privilege to go into a commodity swap as a payer of the fixed price and receiver of the floating price, though in a "get fixed" swaption, the holder has the option to go into a commodity swap as a receiver of the fixed price and a payer of the floating price. Regardless, the writer of the swaption has the obligation to go into the contrary side of the commodity swap from the holder.

With an extendable swap, the fixed price payer appreciates access to a pay-fixed swaption. The extra feature of an extendable swap makes it more costly than a plain vanilla interest rate swap. That is, the fixed ratepayer will pay a higher fixed interest rate and potentially an extension fee. The extra cost can likewise be interpreted as the cost of the embedded swaption.

Features

• Something contrary to an extendable swap is a cancelable, or callable swap, which gives one counterparty the right to early end the agreement.
• A swaption is an option that furnishes one party with the right, yet not the obligation, to go into a particular swap at an agreed-upon fixed price at the latest the predetermined expiration date or dates.
• The swap is extended through an embedded option, which is altered and agreed upon by the counterparties before the swap is fulfilled.
• An extendable swap is one whose tenor can be extended past the original maturity.