Put Swaption

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Definition: Put Swaption

Put swap is an option on an interest rate swap that allows the option buyer to exercise the right to pay a fixed rate of interest, and obtain a floating rate of interest from the option seller / swap counterparty.


The buyer of a put swaption anticipates interest rates to rise and is hedging against this probability, while the seller of a put swaption anticipates interest rates to fall. Settlement of swaptions is generally done on a cash basis.


It is also called a payer swaption. Swaption market members are usually financial institutions and large companies.


For example - consider an organization that has a large amount of floating-rate debt and wants to hedge its exposure to growing interest rates. By obtaining a put swaption, the organization translates its floating-rate liability to a fixed-rate one for the period of the swap. If interest rates increase as anticipated; the company will get the difference between the rates in cash on each date on which debt repayment is due.

 

Hence, this concludes the definition of Put Swaption along with its overview.

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