Swaption (Swap Option)

What is 'Swaption (Swap Option)'

Swaption (swap option) is the option to enter into an interest rate swap. In exchange for an option premium, the buyer gains the right but not the obligation to enter into a specified swap agreement with the issuer on a specified future date.

BREAKING DOWN 'Swaption (Swap Option)'

The agreement will specify whether the buyer of the swaption will be a fixed-rate receiver (like a call option on a bond) or a fixed-rate payer (like a put option on a bond).

RELATED TERMS
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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. When was the first swap agreement and why were swaps created?

    Learn about the history of swap agreements, the first swap agreement between IBM and the World Bank, and how swaps have evolved ... Read Answer >>
  4. 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 >>
  5. Can bond traders trade on interest rate swaps?

    Read about interest rate swaps and why these transactions are performed by institutional actors in the bond market, not individual ... Read Answer >>
  6. How are swap agreements financed?

    Learn how swap agreements are now cleared by swap execution facilities and require the use of collateral margin to hold, ... Read Answer >>
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