Hey everyone, In the book, they mention that payer swpations are like puts whereas receiver options are like calls. However, when looking at the payoff structute, the formula goes like this: Payer swaption: Max (o, FS(0,n,m) - x) (sum b0 h(j)) (this looks like a call option to me) Receiver swaption: Max (0, X- FS(0,n,m)) ( sum b0 h(j)) (while this looks like a put option due to x- exercise price) Why are the formulas reversed? Any ideas?
the Receiver is a CALL on a BOND, Put on an interest rate. Payer = Put on BOND, Call on Interest Rate. Payer=Put on Bond --> this is easy to remember - both have P in it. Receiver=Call on Bond -> C … is both terms.
I remembered the two p’s already but then when I saw the formulas, I got thrown off. Thanks CP , that makes sense.