Can someone explain the logistics of being long/short a receiver/payer swaption?
My understanding is that if you are long a payer swaption, you pay the fixed and receive a floating. But if you’re short the same position, then do you receive the floating and pay the fixed? How is that any different than being long a receiver swaption?
If you’re:
- long a payer swaption, you have the right to enter into a plain vanilla interest rate swap to pay fixed and receive floating
- long a receiver swaption, you have the right to enter into a plain vanilla interest rate swap to pay floating and receive fixed
- short a payer swaption, you have sold someone else the right to enter into a plain vanilla interest rate swap to pay fixed and receive floating; if they exercise it, you are obligated to enter into the swap as the floating rate payer, fixed rate receiver
- short a receiver swaption, you have sold someone else the right to enter into a plain vanilla interest rate swap to pay floating and receive fixed; if they exercise it, you are obligated to enter into the swap as the fixes rate payer, floating rate receiver
So being long a payer swaption is not the same as being short a receiver swaption; the underlying swap is the same, but in one you get to decide whether or not to enter into it, and in the other you have sold that right to someone else.