Put Swaption

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Interest Rate Swap

    An agreement between two parties (known as counterparties) where ...
  2. Currency Swap

    A swap that involves the exchange of principal and interest in ...
  3. Credit Default Swap - CDS

    A swap designed to transfer the credit exposure of fixed income ...
  4. Swap

    Traditionally, the exchange of one security for another to change ...
  5. Swaption (Swap Option)

    The option to enter into an interest rate swap. In exchange for ...
  6. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
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 ... Read Full Answer >>
Related Articles
  1. Insurance

    Credit Default Swaps: What Happens In A Credit Event?

    The credit crisis of 2008 prompted important changes to the settlement of credit default swaps.
  2. Options & Futures

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  3. Bonds & Fixed Income

    The Advantages Of Bond Swapping

    This technique can add diversity to your portfolio and lower your taxes. Find out how.
  4. Options & Futures

    5 Equity Derivatives And How They Work

    These derivatives allow investors to transfer risk, but there are many choices and factors that investors must weigh before buying in.
  5. Options & Futures

    The Perks of Trading Coffee Options

    As more people begin to trade coffee, we explain how coffee options work, who uses them, what drives valuations, and the risks and rewards.
  6. Trading Strategies

    Top Day Trading Instruments

    Day trading is an intense and often appealing activity. Investopedia provides the list of top financial instruments for day trading.
  7. Investing

    How Swaptions Can Reduce Risk in Portfolios

    How can investing in Swaptions reduce risk in portfolios.
  8. Mutual Funds & ETFs

    Are These the Top Inverse ETFs of 2015?

    Short shy? Here's a list of top inverse ETFs to help you profit from a decline in the value of an index or group of stocks.
  9. Stock Analysis

    How Are Interest Rates Affecting Annaly Cap Mgmt?

    Annaly Capital Management reported a net loss of $658 million thanks to the mortgage REIT's strategy of hedging its exposure to higher interest rates.
  10. Investing

    The Best Way To Approach The Currency Hedge

    Currency is going to continue to be an important factor in investment choices, particularly as the dollar strengthens.

You May Also Like

Hot Definitions
  1. Fixed-Charge Coverage Ratio

    A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated ...
  2. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  3. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  4. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  5. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  6. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
Trading Center