Why is a Payer swaptio called a put swaption and a receiver swaption a call swaption?
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payer pays fixed and recieves floating => payer swaption owner bets on rates going up => similar to buying a put option on a Bond similar reasoning for Reciever swaption => buying a call option on a bond.
think of payer swapation as a right ( not an obligation) to sell a fixed rate bond ( hence pay fixed rate of interest) hence its called a put option think of receiver swapation as a right ( not an obligation) to buy a fixed rate bond ( hence rec fixed rate of interest) hence its called a call option u can mess this up if u think swapation from point of view of options on interest rates rather think of them as options on bonds… will make life much more easier
Payer swaption is an option to enter pay-fixed, receive floating swap. Pay-fixed means you are shorting a bond (think of it this way the party who is paying coupons is short). You will exercise your payer swaption only when interest goes up. When interest goes up, value of the bond goes down, and your short positions makes money that is similar to a put. Opposite true for receiver swaption, and thus it is similar to a call (you are receiving fixed and paying floating, i.e. you are long bond, you exercise swap when interest rate goes down, the value of the bond is up, and that is similar to a call)
Payer = Pay Fixed, Receive Floating…you would do this if Int Rates were Increasing…When Int Rates Increase Bond PRices Decreases so hence its also a Put Option on the Bond Price Receivere = Pay Floating, Recieve Fixed…you would do this if Int Rates were Decreasing… When Int Rates Decrease Bond Prices Increase so hence its a Call option on Bond Prices.
I keep forgetting is the put on bond is call on interest…damn it!!! Such simple concept is casuing me all kinds of trouble!!!
okay, the key word is put or call option on a bond…I get it!! Thanks guys
payer - you pay fixed, if you pay fixed you are long libor, if you are long libor you are short bonds