What is ‘Call Swaption’
A type of option between two parties that can be exercised on a swap where the buyer of the swap has the right, but not obligation, to receive an agreed upon fixed interest rate. The buyer pays a premium for the right to swap at this fixed rate. Short for a call swap option, a call swaption can be used as a hedging tool to avoid risk if a bond issuer believes interest rates might decrease.
Explaining ‘Call Swaption’
When a buyer feels it will be beneficial, he may enter into a call swaption, which will allow him to swap interest rates. The buyer of the option receives a fixed rate, compared to a put swaption where the buyer pays a fixed rate.
Further Reading
- A simple method for pricing interest rate swaptions – www.tandfonline.com [PDF]
- Credit default swaptions – jfi.pm-research.com [PDF]
- Throwing away a billion dollars: The cost of suboptimal exercise strategies in the swaptions market – www.sciencedirect.com [PDF]
- On the suboptimality of single-factor exercise strategies for Bermudan swaptions – www.sciencedirect.com [PDF]
- Pricing European commodity swaptions – www.tandfonline.com [PDF]
- An evaluation of multi-factor CIR models using LIBOR, swap rates, and cap and swaption prices – www.sciencedirect.com [PDF]
- Riding the swaption curve – www.sciencedirect.com [PDF]
- Pricing swaptions within an affine framework – jod.pm-research.com [PDF]
- Optimal bank interest margin with synergy banking under capital regulation and deposit insurance: a swaption approach – www.worldscientific.com [PDF]
- Swaptions and options – papers.ssrn.com [PDF]
