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Put Swaption

Put Swaption

What Is a Put Swaption?

A put swaption, or put swap option, is a position on a interest rate swap that gives an entity the right to pay a fixed rate of interest and receive a floating rate of interest from the swap counterparty. Put swaptions are utilized by those substances seeking to earn floating rate interest payments in an interest rate swap deal, in expectation of rising rates.

Put swaptions may likewise be called payer swaptions and can be stood out from a call (receiver) swaption.

Figuring out Put Swaptions

Put swaptions are an option on an interest rate swap. Swaption market participants are generally large companies and financial institutions. These companies try to deal with a portion of the risk from debt they have taken on their balance sheets.

The buyer of a put swaption expects interest rates to rise and is hedging against this possibility. For instance, consider an institution that has a large amount of floating-rate debt and wishes to hedge its exposure to rising interest rates. With a put swaption, the institution changes its floating-rate liability over completely to a fixed-rate one as long as necessary. In this manner, the payer swaption can now plan to pay a fixed rate on their balance sheet debt and receive the floating rate from the call swaption position.

On the off chance that interest rates rise, the put swaption can benefit by getting extra interest. Neither counterparty to a swaption has a guaranteed profit and, on the off chance that interest rates fall below the put swaption payer's fixed rate, they stand to lose from the adverse market move.

Interest Rate Swaps

Interest rate swaps can be important transactions for large elements seeking to oversee risks from rising interest on the debt they have accumulated on their balance sheets. Put swaptions are one leg of an interest rate swap that includes payment of a fixed rate for the return of a floating rate. Interest rate swaps frequently include swapping fixed-rate debt for floating-rate debt for the benefit of overseeing outstanding debt risk.

Generally, counterparties in an interest rate swap deal will take either the put swaption or the call swaption position. The put swaption buyer pays a fixed rate and receives a floating rate. The call swaption buyer pays the floating rate and receives the fixed rate. In interest rate swaps, the difference between the rates is settled in cash on each date on which debt repayment is due.

Call Swaptions

Call swaptions are the inverse to put swaptions and may likewise be called receiver swaptions. A call swaption buyer accepts interest rates might diminish and will pay the floating rate for the chance to profit from the fixed-rate differential.

For instance, consider an institution that has a large amount of fixed-rate debt and wishes to increase its exposure to falling interest rates. With a call swaption, the institution switches its fixed-rate liability over completely to a floating-rate one as long as necessary. In this way, the receiver swaption can now plan to pay a floating rate on their balance sheet debt and receive the fixed rate from the put swaption position. Assuming interest rates fall, the call swaption can benefit by paying lower interest. Neither one of the positions has a guaranteed profit and, in the event that interest rates rise over the call swaption payer's fixed rate, they stand to lose from the adverse market move.

Features

  • Otherwise called a payer swaption, these instruments are purchased by the people who expect interest rates to rise.
  • In a put swaption, the purchaser has the right yet not the obligation to go into a swap contract where they become the fixed-rate payer and the floating-rate receiver.
  • Put swaptions are generally used to hedge options positions on bonds, to aid in restructuring current positions, to modify a security portfolio's duration, or to hypothesize on rates.