This is what I read in the schweser books and I am not able to understand how.
The payer swaption is almost like a protective put in that it allows the holder to pay a set fixed rate, even if rates have increased.
How is it like protective put?
let’s break it down into parts
what does it mean to enter a payer swaption? A payer swaption means that you have the option to enter into a swap as a fixed rate payer and recieve the floating rate.
When is it good to pay a fixed rate and recieve floating? When you think that interest rates are going to go up. So, in essence the payer swaption gives you the protection from rising interest rates.
got it… thanks!!