swaption

A swaption is an option granting its owner the right but not the obligation to enter into an underlying swap. While options can be traded on a variety of swaps, the term "swaption" typically refers to interest rate swaps.There are two types of swaption contracts:A payer swaption gives the owner of the swaption the right to enter into a swap where they pay the fixed leg and receive the floating leg.A receiver swaption gives the owner of the swaption the right to enter into a swap where they will receive the fixed leg, and pay the floating leg.
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Options on interest rate swaps. The buyer of a swaption has the right to enter into an interest rate swap agreement by some specified date in the future. The swaption agreement will specify whether the buyer of the swaption will be a fixed-rate receiver or a fixed-rate payer. The writer of the swaption becomes the counterparty to the swap if the buyer exercises.