Ok so I have something that is unclear lets say you buy a receiver swaption at 6%. at expiration interest rate is 5% the swap is for one year, quarterly payments the value for the receiver of fixed at 6 is (6%-5%) *90/360 * Z1 +(6%-5%) *90/360*Z2+(6%-5%) *90/360*Z3+(6%-5%) *90/360*Z4 is this correct ? and if yes why don’t we care about the floating libor rates? is it because you can hedge it by entering as a fixed paying and floating receiving in another swap I would really appreciate if you guys could give me an answer!

i believe it is correct. the value you get from that swaption is being able to receive payments of 6% fixed when the mkt rate is 5% fixed for the same swap… so you take the difference, as you did, and discount it back. i guess i don’t understand why you would be concerned about the floating rates…

You aren’t worried about floating rates, those are just the rates you have to discount the payments by to get the current day value of your in the money swaption

cfasf1 Wrote: ------------------------------------------------------- > i believe it is correct. > > the value you get from that swaption is being able > to receive payments of 6% fixed when the mkt rate > is 5% fixed for the same swap… so you take the > difference, as you did, and discount it back. i > guess i don’t understand why you would be > concerned about the floating rates… because you are entering a swap in which you are the floating rate payer. but I think i got it thanks

ok. but you pay that floating rate whether you get the 6% fixed swap or 5% fixed swap. and if you didn’t want that exposure to having to pay floating (and wanted to hedge it away), you wouldn’t enter into that swaption in the first place. i think i must have just misunderstood your question.

You just enter a market swap on the other side. You REC fixed at 6 and pay floating on the swaption swap. The market swap you will PAY 5 and rec floaing. The floating cancel and you will just get diff of the fixed payments as an annuity. Discount the payments back to today to find the value.

your exposure is between the fixed of the option and the underlying contract. the floating offset each other. (you receive and then pay)