Please explain this statement equivalent, option

parott

A receiver swaption is equivalent to a call option.

cv4cfa

receiver swaption = right to receive fixed-rate = valuable if interest rate falls = call option on bond

SpyAli

it is equivalent to a call option on a bond because they both benefit when interest rates fall. in a receiver swaption, you pay floating and receive fixed, therefore your betting on rates to fall.

similarly in a call option in a bond , you are betting that interest rates will fall, hence you get to buy the bond at cheaper price. remember that the price of bonds and interest rates are inversely related.

ryanlb

that's it right there. I just packed that freakin' statement and locked it on the right side of my brain until Saturday at 4:05PM.

b_sea93

but if u r receiving floating, won't you be getting less money when interest rate falls? And you'll be paying a fixed rate that would be higher than the lower interest rate? How's that what you want?

redskins44

No it's the right to receive fixed not floating so you would benefit if the interest rate falls. You would pay a cheap rare and receive a high rate

BelalM

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Edited 1 time(s). Last edit at Wednesday, June 1, 2011 at 02:13AM by Damil4real.

jarobi04

canadiananalyst Wrote:
-------------------------------------------------------
> No it's the right to receive fixed not floating so
> you would benefit if the interest rate falls. You
> would pay a cheap rare and receive a high rate


oh yeah, my bad.

5566

the confusion for me in this problem which i think you got from either schweser or stalla, is it doesn't say a call option on a bond or on rates. They would specify on the test i believe.

RMontgomery

They won't...they want you to figure out what makes sense. Only call on bond will make sense here.