IN CFAI vol 5, page 521-522: We are selling a receiver swaption (call) at strike of 5.5-meaning if rates are below 5.5, it will be excerised and we will be receiving fixed-5.5. As per the book, page 522, says that we will be forced to enter into swap to pay 5.5 and rceive libor. I thought this was the other way around. Please clarify.
derswap07, Since we are “selling” the receiver swaption, the counterparty (TSWAPS) has a right (but bot an obligation) to exercise and become a fixed-rate receiver (not “payer”) / floating payer if rate falls below 5.5%. In this case (rate falls below 5.5%), we will be forced to enter into swap to pay 5.5 and rceive libor (floating rate). Does it make sense ?
Thanks AMC. It does make sense.