Cal Smart wrote a 90-day receiver swaption on a 1-year LIBOR-based semiannual-pay $10 million swap with an exercise rate of 3.8 percent. At expiration, the market rate and LIBOR yield curve are: Fixed rate 3.763% 180-days 3.6% 360-days 3.8% The payoff to the writer of the receiver swaption at expiration is: A) $3,600. B) $0. C) -$35,617. D) -$3,600.
A ??
Well, it has to be C or D because the receiver swaption will be exercised since the fixed rate has fallen … Don’t have a calculator at work but I would go with D.
I would say B…
A. receive 1,850 semiannualy 1,850 * .982318 1,850 * .963391 =3,600 Edit: he wrote a reciever, so I guess means sold it to someone else who would excersie it. in that case D
D for sho
agee with cfahouston calculation just that this is the payoff of the writer that we are looking for buyer of option gets 3.8 pays 3.763 that is 3700/2=1850 2 payments of 1850 discounted 1850/1.018 +1850/1.038=3600 so the payoff of the writer is -3600
Florimpop you’re absolutely right.
Since the receiver swaption will be exercised, the party holding the receiver swaption is in-the-money… (3.8-3.763) So, the payoff after 180 days will be (.038-.03763)*(180/360)*10mn = $1850 Discount the 1850 by 1.018 and 1.019^2 for the two timeperiods to obtain the PV of payoff which comes to ~$3600
it’s D!
A! The First Swaption question im getting after the mock exams!! Yipee!!
not a clue on how to do that…
Chad, at expiration, 90 days, you see what the current interest rate is (3.763), vs what was originally set (3.8). Since this is semiannualy pay, the pay off will be (to the person who has to pay fixed and recieve floating - seller of the reciever) (3.763-3.8) * (180/360) * notional amount (10Million) = 1,850. however, the person recieving 1,850 won’t see any money until 180 days & 360 days. So then you have to discount that back by the 180 days(1850/1.0184)) & 360 days(1850/1.038) to bring it to the current value
Thanks very much for these explanations. I’ve given up on pricing/valuing swaps but this one didn’t seem so bad when the answer was clearly explained. Thx all.
Thank CFAHouston, That makes sense now… I see how it would be d…
jeks make sure you understand this is an option on a swap - a swaption versus the regular swaps
I agree with the calculation. BUT Cal Smart wrote the swaption, thus Cal Smart is short. Buyer will be long, but for the long this option is out-of-the-money. It will never be exercised. So the answer should be B
Its B…tricky question.
^^ centralnj-nyc if the fixed rate receiver (the one who bought the receiver swaption which cal smart wrote) is getting 3.8% versus the 3.76%…he would exercise…he’s receiving a higher rate…so how is it out-of-the-money… cfa houston’s calculations are correct - but the signs are reversed…he would have to pay 3600…since he’s the writer
Sorry my mistake, I read it as payer-swaption The long position will be receiving 3.8, thus he will exercise the option and receive 3600. So Cal have to pay