Payer Swaption?

Same here. It was 100k/4 = 25.

Buy payer swaption as he wants to get exposure on interest rise. He receives fixed payments from the 100m from deposit and the wants to swap that out for receiving floating.

25K was 100% an option.

over05 Wrote: ------------------------------------------------------- > Buy payer swaption as he wants to get exposure on > interest rise. He receives fixed payments from > the 100m from deposit and the wants to swap that > out for receiving floating. It was buy a receiver swaption, 100% positive on that one.

Maybe I’m way off here, but wasn’t there a question asking for the valuation of a receiver swaption at maturity? The swaption was based on a nominal value of $100,000 and had an exercise rate of 4.25% and at maturity the market rate was 4.13%. The options were 30,000 117,000 120,000 some other amount I worked out the value as the difference between the mkt rate and the x-rate or 0.12% , times the market value, divided by four (for 4 quarterly pmts) all discounted at the PV factors provided. Of course I knew I did crap since I got a value of $11,700 and that wasn’t one of the choices, so I had to guess $117,000.

i think fourth choice was something like 450k, wasn’t it?

why are you dividing 100/4. It was an option. Options payment is not time apportioned.

iyounus Wrote: ------------------------------------------------------- > why are you dividing 100/4. It was an option. > Options payment is not time apportioned. dividing it by 4 because it was the payoff on a FRA, 90days.

misslee Wrote: ------------------------------------------------------- > iyounus Wrote: > -------------------------------------------------- > ----- > > why are you dividing 100/4. It was an option. > > Options payment is not time apportioned. > > > dividing it by 4 because it was the payoff on a > FRA, 90days. Anyone else have an answer for the value of the swaption? I guessed #117,000 for my answer

117

I chose buy payer swaption. I can’t remember if investor thought interest rates might go up or down. If rates might go up, my answer seems correct. Otherwise, wrong.

Ok here is the story I remember: the manager is sitting on 100m which was in DEPOSIT (meaning it is receiving fixed) and trying to find good inv opportunities. He is worried about two things: 1) the rate may go down 2) the rate may go up What should he do? If rate goes down, he benefits as he is receiving fixed. If rates go up, he will lose if he does not enter into a swap to receiving floating…so the answer is: Buy payer swaption to swap out the fixed stream he is getting to benefit from the higher rates…why everyone says buy receiver option!!! I don’t f*cking understand!!!

i think the problem is the deposit term. my deposits in a money market get floating. for example, a year ago those high yield checking accounts were paying 5.xx %, now they are pay in the mid 3’s

If rates go down he loses on his 100m, to hedge against that he buys a receiver swaption: receive fixed and profit as market rates go down while at the same time paying floating, i.e. paying less since market interest rates are going down.

>If rates go down he loses on his 100m Any one remember the question says the 100m is deposited to receiving floating rate? I have not the slightest trace of memory of that.

He was invested in money-market instruments. 100% sure b/c I checked several times. Also, I can’t remember he was worried that rates would go up. It was split up to two dates anyway, 2 scenarios. One 15 july and the other 15 August I think. Swaption was one scenario.

ok, -1 for me then…

here’s what i remember now, correct me if i’m wrong. He did have a already assets receiving fixed–that’s true. But he was also expecting additional assets in the future and was concerned that by the time he received them rates might drop further. So, he had to hedge on the downside while at the same retaining the potential for higher floating rates at the time of the funds’ receipt. So the fact that he had already a deposit was irrelevant. The focus was on the incoming funds. Hence, a receiver swaption.

he wanted to hedge against changing rates. his money market fund is floating. hence receiver swaption

Lumiere, If the investor wants to protect against rates dropping before receiving new funds, then buying payer swaption seems right. The point of confusion seems to be whether investor wants to protect against a rate decrease on existing funds or new funds. Aaargh. Too many twists in this question.