What's the correct definition of a call swaption?

[yanyan]

The definition given in FRM handbook is:
Call swaption is "option to pay floating and receive fixed", while I also see the opposite definition("pay fixed") from a lot of places.

What's the definition in the industry? Conventionally, people treat it as a call on bond or a call on interest rate?

 

[AlexandreH]

An option in which the buyer of the option has the right to enter into to an interest rate swap as the fixed-rate payer. That is, the seller becomes thefloating rate payer if the buyer decides to exercise the option. It is called a swaption because it is an option on a swap. I wonder about the FRM definition...

 

[yanyan]

Hehe, that's why I am confusing.
Thanks!

 

[feelko]

If u buy a call option on stock -> u have a right to buy this stock. The same logic applies here to rates.

U have a right to buy a rate in future. To buy a rate means that you win if rates going higher, therefore you pay fixed and receive floating.

 

[myampol]

Perhaps because of this potential for confusion, within the industry swaptions are referred to as neither "puts" nor "calls".

Rather, they are named "payer" or "receiver" swaptions, where the designation refers to the fixed leg.

http://en.wikipedia.org/wiki/Swaption

As yanyan has it above, a "call" is an option to receive fixed, and a put would be an option to pay fixed.

Sorry, feelko -- you have it backwards.

 

[yanyan]

Yes, payer/receiver swaptions are another names for them, which are very clear. The unclear thing about the so-called call swaption is whether it's call on IR or call on a bond(in FRM, it's defined as call on a bond). I am just curious which definition practitioners use.

 

[Tsotne]

A swaption is an option granting its owner the right but not the obligation to enter into an underlying swap. One would enter the swaption contract in order to be have long swap in future. For example when you see the possibility of need to change the floating rate obligation with fixed rate in future, you may enter swaption to have long swap in future.

 

[financeguy]

If u buy a call option on stock -> u have a right to buy this stock. The same logic applies here to rates.

U have a right to buy a rate in future. To buy a rate means that you win if rates going higher, therefore you pay fixed and receive floating.

Perhaps because of this potential for confusion, within the industry swaptions are referred to as neither "puts" nor "calls".

Rather, they are named "payer" or "receiver" swaptions, where the designation refers to the fixed leg.

http://en.wikipedia.org/wiki/Swaption

As yanyan has it above, a "call" is an option to receive fixed, and a put would be an option to pay fixed.

Sorry, feelko -- you have it backwards.

how does feelko have it backwards? it seems to me that if you pay fixed on a swap you make money when rates go higher and if you receive fixed on a swap you make money when rates go lower?

 

[AlexandreH]

Perhaps because of this potential for confusion, within the industry swaptions are referred to as neither "puts" nor "calls".

Rather, they are named "payer" or "receiver" swaptions, where the designation refers to the fixed leg.

http://en.wikipedia.org/wiki/Swaption

As yanyan has it above, a "call" is an option to receive fixed, and a put would be an option to pay fixed.

Sorry, feelko -- you have it backwards.

@myampol, I think a "call" would be on the floating part. see links below. I can provide 10 links with same definitions.

http://www.washingtonpost.com/wp-srv/business/longterm/glossary/a_m/call_swaption.htm
http://financial-dictionary.thefreedictionary.com/Call+Swaption

That is confusing. I guess the conclusion is a "call swaption" is a "payer swaption". I prefer going with the "payer" and "receiver" designations, that is easier.

 

[myampol]

Yes, tsotne, we know what a swaption is.

Yanyan's question is regarding the confusing naming of "call" vs. "put" and such relationship with the more straightforward designation of swaptions as "payer" and "receiver."

So, I'll make it very clear:

A payer swaption is a put
A receiver swaption is a call

where the naming convention refers to the fixed leg of the swap.

 

[financeguy]

Yes, tsotne, we know what a swaption is.

Yanyan's question is regarding the confusing naming of "call" vs. "put" and such relationship with the more straightforward designation of swaptions as "payer" and "receiver."

So, I'll make it very clear:

A payer swaption is a put
A receiver swaption is a call

where the naming convention refers to the fixed leg of the swap.

i think you've got it wrong
payer swaption <=> call, receiver swaption <=> put

 

[AlexandreH]

i think you've got it wrong
payer swaption <=> call, receiver swaption <=> put

Yep. I put this already in my last post.
call/put refer to the "floating rate" and buyer/receiver refer to the fixed rate.

 

[financeguy]

Yep. I put this already in my last post.
call/put refer to the "floating rate" and buyer/receiver refer to the fixed rate.

err not quite i dont think? in the IR opts market u only talk about payer or receiver
so a payer swaption is what in academia you'd consider a call option (or u can say its analogous to a call option), as you pay fixed and receive floating and therefore benefit as rates rise (i.e. you are long delta)
you dont use call/put to refer to the floating rate or anything, what you do with the floating leg is implied by what you do to the fixed leg which is specified by payer and receiver

 

[AlexandreH]

err not quite i dont think? in the IR opts market u only talk about payer or receiver
so a payer swaption is what in academia you'd consider a call option (or u can say its analogous to a call option), as you pay fixed and receive floating and therefore benefit as rates rise (i.e. you are long delta)
you dont use call/put to refer to the floating rate or anything, what you do with the floating leg is implied by what you do to the fixed leg which is specified by payer and receiver

I agree. I am just saying that this could be a way to understand the meaning of call/put. call is buying the floating, and put is selling the floating. Again, I prefer using the payer/receiver syntax.

 

[myampol]

@myampol, I think a "call" would be on the floating part. see links below. I can provide 10 links with same definitions.

http://www.washingtonpost.com/wp-srv/business/longterm/glossary/a_m/call_swaption.htm
http://financial-dictionary.thefreedictionary.com/Call Swaption

That is confusing. I guess the conclusion is a "call swaption" is a "payer swaption". I prefer going with the "payer" and "receiver" designations, that is easier.

I'm sorry, but those websites have it backwards, too.

 

[myampol]

i think you've got it wrong
payer swaption <=> call, receiver swaption <=> put

Sorry, I disagree.

 

[myampol]

I agree. I am just saying that this could be a way to understand the meaning of call/put. call is buying the floating, and put is selling the floating. Again, I prefer using the payer/receiver syntax.

Nope; call swaption is receiving fixed ; put swaption is paying fixed.

 

[AlexandreH]

Nope; call swaption is receiving fixed ; put swaption is paying fixed.

@myampol, You are right. It cannot be more official than this:
http://www.amex.com/servlet/AmexFnDictionary?pageid=display&word=Receiver's Swaption

So, I guess all those sites have it wrong.

 

[yanyan]

hehe, finally there is an official definition. Thanks all for answering my questions.

 

[pruse]

Nope; call swaption is receiving fixed ; put swaption is paying fixed.

Nope. It should be the opposite. Think about it... when you're long a call, it makes sense to have a long position in the floating rate. In other words, you would exercise if the floating rate is above the fixed rate, because you would be receiving the floating rate and paying the fixed rate.

Also, this is the definition the firm I work at uses.