DEFINITION of 'Put Swaption'

An option on an interest rate swap that gives the option buyer the right to pay a fixed rate of interest, and receive a floating rate of interest from the option seller / swap counterparty. The buyer of a put swaption expects interest rates to rise and is hedging against this possibility, while the seller of a put swaption expects interest rates to fall. Settlement of swaptions is usually on a cash basis.

Also known as a payer swaption.

BREAKING DOWN 'Put Swaption'

Swaption market participants are generally large companies and financial institutions. As an example, consider an institution that has a large amount of floating-rate debt and wishes to hedge its exposure to rising interest rates. By buying a put swaption, the institution converts its floating-rate liability to a fixed-rate one for the duration of the swap. Should interest rates rise as anticipated, the company will receive the difference between the rates in cash on each date on which debt repayment is due.

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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 is an over-the-counter derivative?

    Learn more about over-the-counter derivatives and how they work with an example of a derivative trade-off exchange. Read Answer >>
  3. Do interest rate swaps trade on the open market?

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  4. Can individual investors profit from interest rate swaps?

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  5. How do companies benefit from interest rate and currency swaps?

    An interest rate swap involves the exchange of cash flows between two parties based on interest payments for a particular ... Read Answer >>
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