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.作者: thommo77 时间: 2011-7-11 19:49
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.作者: mik82 时间: 2011-7-11 19:49
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)作者: susana 时间: 2011-7-11 19:49
Got it, my apologies -- I was looking at this from the investor perspective, not the issuer
