If you sell a payer swaption that would mean if excercised then you would be recieving fixed and paying floating correct?
becasue if you buy a payer swaption you would be paying fixed and recieving floating
on 17.5 of exam 3 kaplan it says the oposite and im confused
I think Schweser is wrong . If the company is receiving fixed on the swap , then to hedge they need to buy a payer swaption ( so when rates rise they can excercise and hedge out the swap) . selling the payer swaption would be beneficial only when rates fall, not when rates rise. In any case selling an option to hedge a position seems unnatural to me , because it is not risk mitigation when you sell an option , it is generating income by selling insurance
so the answer should be: sell a payer swaption to hedge a callabele bond right?
a callable bond is not a swap , its just a loan .
you could buy an interest rate put option to hedge it . But we’e talking about swaps and swaptions here
haven’t seen question you are referring to, but pretty sure you can’t hedge anything by selling an option. You don’t get to choose whether or not to exercise it (the buyer does), all you get is a bit of extra income from the premium…
If you want to hedge something, you need either a firm agreement – a forward, future, swap, whatever – or you need the right to decide on the agreement: long an option. You cannot hedge something by giving the right to decide to someone else; selling an option isn’t hedging.
answer to 17.5 of Kaplan 3 confirms what forummers are saying here .
The answer basically says that instead of hedging the risk , the company is increasing the risk , that they’re hedging incorrectly .
This makes total sense , because selling an option means getting paid now for taking increased risk in the future ( opposite of hedging where you pay now to decrase risk in the future )