A financial instrument giving the buyer the right, or option, to enter into a swap as a floating-rate payer. The writer of the swaption therefore becomes the floating-rate receiver/fixed-rate payer.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
An option on an interest rate swap in which the buyer of the option has the right to enter into an interest rate swap as the payer of the floating rate and the receiver of the fixed rate. This means that the seller (writer) is the receiver of the floating rate and payer of the fixed rate. This is an attractive option when interest rates are expected to rise as the buyer of the option would generally receive more in interest than he/she/it pays out. See also: Call swaption, Plan vanilla swap.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved