Why would one enter into a payer swaption v a received floating pay fixed swap? (premium not being a factor)
Swaption is used when you are planning to take out a loan or planning to invest in bonds because the underlying swap is not due until swaption expiry Swaps are used if you imminently need to hedge ( because the swap would be effective immediately)
Swaptions can also be used to hedge yourself against unfavorable interest rate movements. If you’re a company that issue floating rate bonds then you can hedge your interest rate expenses if you’re afraid interest rates will rise in the future.
for long Swaption, the buyer is looking to hedge interest paid on loan should interest rate increase. will exercise the option if IR is higher than X. will get return from the difference in (IR-X)*T*notional principal to offset higher IR paid to lender.
what is a long swaption? I don’t think there is such a terminology. There is a payer swaption and a receiver swaption only.
bpdulog Wrote: ------------------------------------------------------- > Swaptions can also be used to hedge yourself > against unfavorable interest rate movements. If > you’re a company that issue floating rate bonds > then you can hedge your interest rate expenses if > you’re afraid interest rates will rise in the > future. Indeed, but again one could enter into a receive floating swap for the same thing… Janakisri, indicates it is a time thing, swaption when the loan is to be taken out sometime in the future, vs a swap when its today… Is that the distinction?
swaption is an OPTION to enter into a swap in the future if the rate on the swap is better than the strike rate. that is the only distinction. Swap you enter into immediately, with a swaption you have the option to push the swap into the future…
rolo550 Wrote: ------------------------------------------------------- > bpdulog Wrote: > -------------------------------------------------- > ----- > > Swaptions can also be used to hedge yourself > > against unfavorable interest rate movements. If > > you’re a company that issue floating rate bonds > > then you can hedge your interest rate expenses > if > > you’re afraid interest rates will rise in the > > future. > > > Indeed, but again one could enter into a receive > floating swap for the same thing… > > > Janakisri, indicates it is a time thing, swaption > when the loan is to be taken out sometime in the > future, vs a swap when its today… > > Is that the distinction? But what if you’re not sure how rates will react? Why hedge yourself now and reduce the additional return you can gain if rates go the other way.