jarobi04

I just did this this morning...

Receiver swaption is an option to enter a swap as the fixed rate receiver, right. Say the 'strike' rate in the swaption is 6%. So if you excercise the swaption, you're gonna receive fixed payments based on 6% interest.

Now if at expiry of the swaption, the market swap rate is 4%, that means that by excercising the swaption and entering into the swap at the 6% rate, you're getting 2% more than other people who enter into a swap straight from the market.

Notice also that swap rates go down as interest rates go down. (just look at the formula for calculating the swap rate). So you win when swap rates (i.e. when interest rates go down).

With a put option on interest rates, you ALSO win when rates go down.

Reverse argument for why payer swaption is similar to a caplet/call on interest rates.