I just did a practice question that asked for the value of a reciever swaption. The $ amount was negative, but the answer was $0, since “The value of the receiver swaption is zero since the exercise rate is below the market rate.” That makes sense to me–I assume the swaption would just expire without exercise (and the holder would just lose his premium). My question is this: in the same way that a swaption to the holder can either be positive or zero at a minimum, can the payoff/value to the writer be either negative or zero? In other words, if the writer “wins”, it just means that the holder will not exercise so the max value to the writer of a swaption should always be zero? Thanks for the help.
I dont’ know the answer to your question but it makes me feel better to know what I’m not the only one studying on a Saturday night. Go us
swaption is an option , so if there is no excericise all the way to expiry , the writer wins the premium he collected at initiation . Isn’t that the way options work? Selling insurance against some possibility that the buyer wants to hedge , and collecting money in advance
> if the writer “wins”, it just means that the holder will not exercise so the max value to the > writer of a swaption should always be zero? like janakisri says, yes that is true, aside from the initial premium. After collecting the premium, your maximum gain is zero.
yes thats what i thought. tricky question can definitely be to value a swaption for a writer and give a negative number and zero in the answers, particularly because for swaps (not swaptions) the value to the short can be negative