Simple Swap Question next, question, respect, someone

spartanag07

With respect to Schweser Volume 1 Exam 2 Afternoon Session question 18.6, when someone says a one-year payer swaption, does that mean you have the option to enter a pay fixed swap for the next year or does that mean you have the option to enter a one-year swap? Totally confused.

ayaz_mahmud369

Here ya go, remember this:
“Swaption” = “Fixed”
That should help you out…………

bkballa

My question is with regards to timeframe. I know the structure of the swaption. I’m asking if a one-year swaption represents one year until expiration or a one-year swap once exercised. Make sense? Thanks.

cfalevel2011

In one year, you get to enter a swap at the swaption’s price.
That’s all there is to it…
J.

xilinx_altera

For the example, the option (or swaption) to enter as the fixed payer swap will expires in one year, but the hedge should be a three year quarterly pay fixed receive floating swap. The question is not clear what is the term of the floating rate of LIBOR + 1.5% but I assumed it is a 3 year LIBOR + 1.5% (variable since it depends on LIBOR but fixed bec it is not subject to quarterly or annual reset).

malbec

Fair enough - thanks for the help. I think it was a pretty confusing question.