A swaption in which the buyer has the right to enter into a swap as a fixed-rate payer. The writer therefore becomes the fixed-rate receiver/floating-rate payer.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
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 the floating rate payer if the buyer decides to exercise the option. It is called a swaption because it is an option on a swap. A swaption is useful if an interest rate swap may be useful for the buyer's investment strategy, but there is still some uncertainty as to whether that will be the case. See also: Put swaption, Plain vanilla swap.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved