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Zesty

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tT
发表于 2011-7-11 19:49 | 只看该作者

Swaption quiz challenge

challenge, about, paying, annual
You issued a non-callable bond paying 8% annual coupon but would like make it callable. How would you go about doing this using a swaption? Demonstrate with cash flows.

 

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thommo77

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2#
发表于 2011-7-11 19:49 | 只看该作者
agreed with long receiver swaption.

What's 7 bpdulog?

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jmh530

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3#
发表于 2011-7-11 19:49 | 只看该作者
stevenevans Wrote:
-------------------------------------------------------

>
> Let me know whether this analysis is correct.

You are making it way too complicated.

When you buy a receiver swaption, you have paid a premium for it.

When interest rates go down, you would not want to pay the 8% on the coupon. So you exercise the swaption. Cash flows:

Pay 8% on bond
Receive 8% of fixed side of swap
Pay LIBOR (which has gone down)

NET: Pay LIBOR.

When interest rates go up, you are quite happy that you only have to pay 8%. So you do not exercise the swaption. Cash flows:
Pay 8% on bond.

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mik82

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4#
发表于 2011-7-11 19:49 | 只看该作者
the question says, you issued the bond, therefore if you want to have positive convexity (as on short callable) you need to buy the option (receivers)

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susana

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5#
发表于 2011-7-11 19:49 | 只看该作者
Got it, my apologies -- I was looking at this from the investor perspective, not the issuer

I'm stupid, really stupid!

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