Swaption question

CFA Level II Portfolio Management
#1

I cant get my head around this, can anyone help explain in simplest term

  1. In order to remove the call feature from their callable issue? A. Purchasing a receiver swaption with an exercise rate of 15%. B. Selling a receiver swaption with an exercise rate of 10.5%. C. Buying a payer swaption with an exercise rate of 19.5%.

You can ignore the rate.

As far as Im concerned, as the investor have callable bond, meaning they are at loss when interest rate delince ( bond issuer will call back), Hence to hedge they should buy a receiver swaption = right to get fixed from a swap (benefit when interest declines). Where am I wrong here?

#2

This question sounds like it’s from an issuer’s perspective since he has a “callable issue”.

When interest rates decline, the counterparty will exercise the swaption against the issuer. The issuer can then call the bond and sell new non-callable bonds with the same coupon and maturity.