The payoff on a receiver swaption is most like that of a:
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The payoff on a receiver swaption is like that of a call option on a bond issued at the exercise date of the swaption, with a coupon equal to the fixed rate of the swap, and a term equal to that of the swap.
Consider a 3-year quarterly-pay bond to be issued in 180 days with a 7% coupon. A 180-day put option on this bond, with an exercise price rate of 7%, has a payoff equal to that of a:
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The payoff on a payer swaption is equivalent to that of a put option on a bond as described in the question.
Wanda Brunner, CFA, is contemplating adding a swaption to her portfolio. She makes the following two statements about the possible payoffs and cash flows of an interest rate swaption:
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Statement 1: |
Exercising an in-the-money swaption effectively generates an annuity over the term of the underlying swap. |
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Statement 2: |
A positive payoff to a receiver swaption each quarter is the interest saved by receiving the higher fixed rate. |
Which of the following statements are CORRECT?
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Exercising an in-the-money swaption effectively generates an annuity over the term of the underlying swap. The amount of each annuity payment is the interest savings that result from paying a rate lower than the market rate under a payer swaption or the extra interest that results from receiving a higher rate under a receiver swaption.
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