Hi guys, Just wanted to point out an inconsistency: Page 219 of the Secret Sauce says that a Payer Swaption is also a Put Swaption, while Receiver Swaption is a Call Swaption. But in the Schweser essay Q-Bank it reads: A payer swaption (call swaption) gives the buyer the right to be the fixed-rate payer and the floating-rate receiver at the expiration of the swaption, thus insulating him from rising interest rates. A put swaption gives the holder the right to pay floating and receive fixed, is also called a receiver swaption, and protects the holder of the option against a decrease in interest rates, not an increase. I don’t have my actual CFA text with me so I can’t check that right now. Can anyone confirm with source is correct
Receiver has C in it – it is the Call Option on Bond. Payer has P --> Put.Option on Bond.
Excellent. Thank you
Still seems like a shit question to me. Here is why: CPK is right, payer swaption resembles a put ON A BOND. But these are talking about rates, not bonds. A Receiver swaption lets you enter as a fixed rate payer, so you are long the rate because you think its going to go up and you benefit if it does since you can pay the lower fixed rate than the current higher market rate. Because the higher rate would cause a bond price to fall, it is like a put on a bond, but since we are talking about interest rates, it’s more like a call. I think the question they asked you sucked, they should be specific as to whether it resembles a put on a bond or on the interest rate, anyone else wanna back me up on this?
Put on Bond = Call on Rate…
Yah, i know, hence what i said above. The question is too vague, it just says payer swaption is a (call swaption). Typically when we are talking about swaptions we are talking about rate contracts, not bonds, therefore it’s misleading. It should say payer swaption (call on rate). As it is presented in the first post, i would say the qbank is right and the sauce is wrong, unless the sauce references it being a put on a bond, not the rate.