is it me or is this worded really obscurely? is the guy trying to hedge is future position in the swaption, thereby trying to get in on an opposite side? or are the statements describing the already present paper swaption position?
Not too poorly worded. Basically, the question reads as though he will 100% enter into a payer swap in 6 months. If he has to enter into this payer swap (which we assume he has to), he is taking the risk that interest rates increase between now and 6 months from now. Thus, by getting himself into a payer swaption, he can hedge this risk. If rates fall, he will not excercise this payer swaption, which is why statement 5 is incorrect.
I had the same reaction as iregula to this question, thought it was poorly worded. I didn’t take a face value that they were necessarily the pay-fixed b/c I thought that determining that was part of the question. So I was looking for something that said what their “risks” were, but couldn’t find any. In the end I guessed and got it “right”.