# Receiver swaption=a call option? **Spoiler**

Question 53, Mock Exam Afternoon Session. The answer says that a “Receiver Swaption=a call option,” but I thought that a payer swaption pays when the floating rates go up (cause you pay fixed and receive floating, so you want the floating rate to increase.) So doesn’t that mean that the payer swaption is like a call option? I know that a long call is equal to a series of long calls and short puts at the issue rate on payment dates; why is this different?

Call option on a Bond = receiver swaption I havent done the mock yet , but guess this is what they are talking about …

yeah, remember the inverse interest rate effect. They’ll catch ya on that stuff!

ok so a receiver swaption is a call option on a bond because the bond increases in value when interest rates decrease, whereas a stock increases in value when interest rates increase? Is this that chart in Schweser like “a call on LIBOR increases when stocks go up and decreases when bonds go up…”?

ap1978 Wrote: ------------------------------------------------------- > Call option on a Bond = receiver swaption > I havent done the mock yet , but guess this is > what they are talking about … Thanks for the clarification, I keep thinking they are referring to a call option on interest rates.

Are both payor and receiver swaptions call options?

I did the mock this weekend and I also got this question wrong. The CFAI txt specifically in the front of the chapter says that a receiver is a call and a pay is a put. I’m not god’s gift to derivatives but i’ve spent time on a Inter Rate Deriv desk and I currently work in Equity Options Strategy and in the real world it would never be thought of that way. For starters, if your paying the fixed rate on a swap. You win when interest rates rise… how could that be a put? whatever… I’m gonna play the game here, answer how they want.

Infinitesun – you are looking at it as a rate. But if you looked at it (underlying) as a Fixed income instrument - when rates rise - FI Instrument falls in value - then it becomes a PUT. So Payer Swaption: Int Rate underlying - rate rises - Swaption has value if it is a CALL. FI Underlying - rate rises – Value falls – Swaption has value if it is a PUT.

I hear ya, I just haven’t met anyone that trades these things that has referred to them in that fashion. (text book vs. real life).

As someone already mentioned, the tricky part is that you need to differentiate between call option on interest rates and call option on bonds. Receiver swaption allows the long side to enter into a swap as the fixed receiver. This is equivalent to a long put and short call on interest rate. This is also identical to a short put and long call on bonds, since interest rate is negatively correlated with bond yield.

My notes … i plan to learn these to memory, should cover most questions they can ask about this stuff! Payer swap = series of long call / short put Receiver swap = series of short call / long put Long cap = series of long put on FI / call on IR Long floor = series of long call on FI / put on IR Payer swaption = put option on bond Receiver swaption = call option on bond Floating rate payer in IR swap = series of short FRA (both have liability when rates increase above contract rate) Swap with n payments left = strip of n-1 FRAs

Infinitesun Wrote: ------------------------------------------------------- > I hear ya, I just haven’t met anyone that trades > these things that has referred to them in that > fashion. (text book vs. real life). Fully agree. I have spent time on a structured FI desk and not once have I seen this kind of abstract BS. I haven’t looked at derivatives yet but if this is true, just shows how ‘useful’ CFA is in practical situations. Squat! I guess I better start crackin’ on Derivatives, thought I could swing this section without studyin’. Guess not!