What’s the difference?
you receive the premium as option writer…But, to me, the exposition is the same.
when buying a payer swaption you are paying the fixed rate and receiving the floating. writing a receiver option is similar to buying a payer swaption i think because you are basically like this -(Fixed-floating) which is equal to buying a payer swaption which is equal to (floating-fixed).
and like erobak said, you also receive a premium when you sell the receiver swaption.
So no difference?? Then WTF was the answer to this one, lol if you want to switch your fixed exposure to a floating one what do you do?
I put buying a payer swaption because if the interest rates don’t go in your favor at least you can simply not exercise but writing a receiver swaption comes with the problem of the other party exercising when it becomes in the money not really sure anymore but it made sense at the time
I wa confused too. But if you receive the premium, you can earn some interest on it, so I have choose that thing because its a plus.
when you write option you have premium and tons of potential losses. if you buy option you have flexibility, potential gains and your losses are limited to premium you pay. If you buy option for hedging you need to match type payer/receiver with your exposure, fixed or float.
jpsi1 Wrote: ------------------------------------------------------- > when you write option you have premium and tons of > potential losses. > if you buy option you have flexibility, potential > gains and your losses are limited to premium you > pay. > If you buy option for hedging you need to match > type payer/receiver with > your exposure, fixed or float. thats how I saw it. Because lets say you already own a fixed rate bond and wanted to swap it for floating because u think IR will increase if you write a receiver swaption and the IR falls then you are fked because how you are giving up higher fixed for lower float since the buyer will obviously exercise.
and remember when you buy a payer swaption (or any option for that matter), the long has credit risk, not the short.
daveyc18 Wrote: ------------------------------------------------------- > and remember when you buy a payer swaption (or any > option for that matter), the long has credit risk, > not the short. no in a swap both parties have credit risk of the other defaulting.
? short gets the premium; if the long goes bankrupt, this doesn’t matter to the short, since he already got $.
agree with davey18. we are talking about option on swap. So it’s an unilateral default risk.
daveyc18 Wrote: ------------------------------------------------------- > ? > > short gets the premium; if the long goes bankrupt, > this doesn’t matter to the short, since he already > got $. if IR goes up and long exercises… but the premium short received isn’t enough and it has no more money. How is the long going to get paid??
that’s why the long has credit risk, because if the short defaults, the long loses. credit risk in this context means the risk of not getting paid. example: it’s like you give for this payer swaption, IR goes up, which is good for you. but i've been spending like crazy and i;m now broke, so i can’t pay up. i got your money, ran with it, and now i can’t pay. so you lose in this case.
so wats the answer finally?
meshed Wrote: ------------------------------------------------------- > so wats the answer finally? thats what i dont get: writing receiver swaption - you get the premium, great! but then if IR goes down and you have to pay a higher fixed then you lose money buying payer swaption - you have to pay the premium but at least you can simply not exercise if IR goes down. You just keep your higher fixed rate bond But the problem is the investor was looking to exchange the fixed exposure with a floating one and it didn’t specify under what conditions. (i.e. does he still want to do that if IR goes down? even though he will lose money)
but writing a swaption would give you an obligation to swap whereas buying an swaption would give you the option (but not the obligation to). i’d imagine the premium for writing the swaption would be relatively small in comparison to the contract. allegedly.
millow Wrote: ------------------------------------------------------- > but writing a swaption would give you an > obligation to swap whereas buying an swaption > would give you the option (but not the obligation > to). > > i’d imagine the premium for writing the swaption > would be relatively small in comparison to the > contract. > > allegedly. +1
daveyc18 Wrote: ------------------------------------------------------- > that’s why the long has credit risk, because if > the short defaults, the long loses. credit risk in > this context means the risk of not getting paid. > > example: > > it’s like you give for this payer swaption, IR \> goes up, which is good for you. but i've been \> spending like crazy and i;m now broke, so i > can’t pay up. i got your money, ran with it, and > now i can’t pay. so you lose in this case. The short can have credit risk too! Imagine that the long excersices his swaption (since interest rates have gone up). You pay lower fixed and get higher floating, and hence you are making money. Imagine, however, that interest rates suddenly drop below the fixed rate u pay (after, of course, you have excercised ur in the money swaption). Now the short of the contract is making money (receives high fixed, pays low float). The short, therefore, bears credit risk (the risk that YOU default on your payments to him).