Put Swaption


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.

  1. Credit Default Swap - CDS

    A particular type of swap designed to transfer the credit exposure ...
  2. Interest Rate Swap

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

    A swap that involves the exchange of principal and interest in ...
  4. Swaption (Swap Option)

    The option to enter into an interest rate swap. In exchange for ...
  5. Swap

    Traditionally, the exchange of one security for another to change ...
  6. Put-Call Parity

    A principle that defines the relationship between the price of ...
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. Professionals

    Top Stocks to Short, Go Long On to Beat the Market

    A long/short portfolio can help weather a variety of market scenarios. Here's how to put one together.
  6. Investing Basics

    What Does Plain Vanilla Mean?

    Plain vanilla is a term used in investing to describe the most basic types of financial instruments.
  7. Options & Futures

    Pick 401(k) Assets Like A Pro

    Professionals choose the options available to you in your plan, making your decisions easier.
  8. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  9. Mutual Funds & ETFs

    The Risks of Investing in Inverse ETFs

    Discover analyses of the risks inherent to inverse exchange-traded funds (ETFs) that investors must understand before considering an investment in this type of ETF.
  10. Mutual Funds & ETFs

    Top 4 Inverse Equities ETFs

    Explore analysis of some of the most popular inverse and leveraged-inverse ETFs that track equity indexes, and learn about the suitability of these ETFs.
  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 >>
  2. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  3. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  4. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  5. How can I hedge my portfolio to protect from a decline in the food and beverage sector?

    The food and beverage sector exhibits greater volatility than the broader market and tends to suffer larger-than-average ... Read Full Answer >>
  6. What techniques are most useful for hedging exposure to the insurance sector?

    Investing style determines the best hedging techniques for the insurance sector. This sector comprises three segments, two ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!