Swaption
An option to enter an interest rate swap at a set fixed rate. A payer swaption gives the right to pay fixed and gains when swap rates rise; a receiver swaption gives the right to receive fixed.
Where you will meet it
Swaption appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Explain how the Black model values European swaptions and European interest rate options
“A payer swaption, the right to pay fixed, is a call on the forward swap rate: notional × annuity factor (the sum of discount factors over the underlying swap) × [FS × N(d1) − X × N(d2)].”
- Assess liability-driven strategies across a range of interest rate scenarios and choose the one that best meets the portfolio's goals
“A receive-fixed swap hedges both ways; a receiver swaption protects against falling rates for a premium while keeping the gain if rates rise; a collar lowers cost but caps that gain.”
- Show how derivatives can set a portfolio's equity and interest rate exposures at chosen targets
“Options suit asymmetric targets, such as puts to floor equity losses or payer swaptions against rising rates.”
- Build a positioning strategy around an expected rise or fall in interest rate volatility
“If the manager expects realised volatility to exceed the implied volatility priced into options, adding convexity pays: buy options such as calls on bond futures or swaptions, or prefer option-free bonds and barbells to callable bonds and mortgage-backed securities, which are short volatility.”
See also
Interest rate swap · Swap rate
Practise it
Practise swaption until it is automatic: questions that explain every wrong option.
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