Call Swaption

DEFINITION of 'Call Swaption'

A type of option between two parties that can be exercised on a swap where the buyer of the swap has the right, but not obligation to, receive an agreed upon fixed interest rate. The buyer pays a premium for the right to swap at this fixed rate. Short for a call swap option, a call swaption can be used as a hedging tool to avoid risk if a bond issuer believes interest rates might decrease.

Also known as a payer swaption.

BREAKING DOWN 'Call Swaption'

When a buyer feels it will be beneficial, he may enter into a call swaption, which will allow him to swap interest rates. Regardless of whether the buyer of the option is the rate receiver or the payer, the interest rate will be fixed, based upon terms of this agreement.

This type of swap occurs in forex trading as a currency swap where the interest paid is also agreed upon.

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RELATED FAQS
  1. What is a Bermuda swaption?

    The Bermuda swaption refers to a modified American style of option. A swaption is an option on an interest rate swap in which ... Read Answer >>
  2. What would motivate an entity to enter into a swap agreement?

    Learn why parties enter into swap agreements to hedge their risks, and understand how the different legs of a swap agreement ... Read Answer >>
  3. What are interest rate swaps on the OTC market?

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  4. What is an absolute rate?

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  5. Can individual investors profit from interest rate swaps?

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