bingbingliang

sorry, i still have trouble. so a one year put equals a one year floor. and a 2 year put . equals a one year floor plus a two year floor. when are the pay offs i just dont seem to understand the logic behind this! :-(

MiniMe7

I'm not sure If I have seen a Q on this or not.

However, it does specifically mention in the book that the payor is a put and a receiver is a call so that is why I memorized these in this respect. I figure if it's in the book, it's pretty much fair game for the test.

ppls

As I understand now payer swaption = put on BONDS.

PUT on bonds - you want bond value to fall for the put to be in the money. Bond values fall when rates go UP. You want rates to go UP to "win".

Payer Swaption - pay fixed rate is the strike (set at initiation), so you want rates to rise over strike meaning you are paying this fixed amount that is lower than the fixed amount that fools in the market have to pay.

In both cases you WIN if rates go UP.

Flip it and you can see why receiver swaption = call on BONDS.