With respect to Schweser Volume 1 Exam 2 Afternoon Session question 18.6, when someone says a one-year payer swaption, does that mean you have the option to enter a pay fixed swap for the next year or does that mean you have the option to enter a one-year swap? Totally confused.
you have the option to enter a swap as fixed rate payer
Here ya go, remember this: “Swaption” = “Fixed” That should help you out…
My question is with regards to timeframe. I know the structure of the swaption. I’m asking if a one-year swaption represents one year until expiration or a one-year swap once exercised. Make sense? Thanks.
In one year, you get to enter a swap at the swaption’s price. That’s all there is to it… J.
Yup, it means option on the swap expires in one year…
For the example, the option (or swaption) to enter as the fixed payer swap will expires in one year, but the hedge should be a three year quarterly pay fixed receive floating swap. The question is not clear what is the term of the floating rate of LIBOR + 1.5% but I assumed it is a 3 year LIBOR + 1.5% (variable since it depends on LIBOR but fixed bec it is not subject to quarterly or annual reset).
Fair enough - thanks for the help. I think it was a pretty confusing question.