Posted in Finance, Accounting and Economics Terms, Total Reads: 375
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.