Swaption and interest option, what is the difference? plz help !!

CFA Level II Portfolio Management
#1

I can not differentiate between swaption and interest option, could somebody explain in very basic language, i read the derivatives L2 curriculum for 5 days but can not understand thoroughly! Thank all of you in advance

#2

  1. Swaption allows the holder the right but not the obligation to enter into an interest rate swap, pay fixed receive floating or pay floating receive fixed.

  2. Whereas an IR option (say a call option) is the right to be long interest rate at strike price (of say 3%). So if IR is 4% tomrw, the holder is in the money.

Key diff: First one is an option to enter into a “protection” against IR movement contract whereas second one is the “protection” against IR movement itself.

#3

You can think of an interest rate option as a one-period swaption.

Voilà!

#4

^your brief summarisation reminds me of how i love maths

#5

Cool!

#6

Again thank you all, i understand now! !!! (Y)

#7

My pleasure.

Good to hear.