Jul 282017

An option on a swap. A payer’s swaption gives the holder the right to pay fixed in an interest rate swap if he so wishes. A receiver’s swaption gives the holder the right to receive fixed in an interest rate swap. A payer’s swaption could be bought to hedge the floating rate debt cost of a major stage in a project financing, for example – if rates have risen at the end of the life of the option it will be exercised to allow the project to pay fixed in a swap. If rates have fallen then the option is allowed to die and the swap is not entered into

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