why ? please add some comments.
Consider a 3-year quarterly-pay bond to be issued in 180 days with a 7% coupon. A 180-day put option on this bond, with an exercise price rate of 7%, has a payoff equal to that of a:
A) receiver swap. B) payer swaption. C) receiver swaption.
Your answer: C was incorrect. The correct answer was B) payer swaption.
The payoff on a payer swaption is equivalent to that of a put option on a bond as described in the question.
you ask so many questions…
you should check your book it helps a lot.
a put on a bond gives you the right to sell this bond in 180 days for 7 % ( so you will pay fix 7% if you assigne the put )
since it’s a option, you have the " right to do it " just like a swaption
then if you pay fix you will reiceve LIBOR : Libor - Fix
this is a payer fix swaption. so B
If you own a bond, you get fixed payments of coupons.
If you have a put option on that bond, you have the right but not the obligation to SELL that bond. To SELL your right to RECEIVE Fixed Income cuz you don’t want it. You can make somebody else take the Fixed Rate [that is your right that u paid good money for] so you can get a better/higher floating rate if it becomes available. You exercise and make money on that put option against that bond when it’s more lucrative to get a higher floating rate than be stuck with a relative lower fixed rate, though 7% is pretty good. This is the same exposure as paying fixed [giving away the fixed coupons you don’t want] and receiving float, which is what a Payer Swaption does: “A payer swaption gives the owner of the swaption the right to enter into a swap where they pay the fixed leg and receive the floating leg.” It’s the same bet, you have the option to long the float and short the fixed rate.
The financial market will always speak from the Fixed side so if they said Receiver Swap or Payer swap, I read it as Receive “Fixed” Swap, Pay “Fixed” Swap. Insert in the word and figure which side you are on.
“A” would have been correct if it wasn’t for the 180 day period. This is because we don’t know who is paying fixed and who is paying float. So, B is correct.
Thanks but still confused? If I buy a call on interest rate at 7% , so I have a right to borrow at 7% meaning I pay fixed and receive floating. but If I buy a put on interst rate at 7% , so I have a right to lend at 7% meaning I receive fixed and pay floating.
In this case , I have a right to sell a bond which is pay fixed coupon, so I should receive floating , how come I pay fixed?
thanks
a call on interest rate is not the same as a call on a bond
If you buy a call on interest rate, you pay fixed and receive the loan amount… you don’t receive floating rate.
I think some of the answers in here are doing more harm than good.
Maybe this will help: a put option increases in value when the underlying falls in value
Payer Swaption = Pay fixed and receive float. You’re in the green when floating rates are higher than fixed.
A Put on a bond = you’re in the green when the bond is trading below par. It’s trading below bar when floating rates are higher than fixed.