Any advice would be greatly appreciated as I’ve been struggling on this for several days.
Question: Paying a floating rate loan and we expect interest rates to increase so we buy an Payer swaption to lock in a fixed payment. Now we want flexibility so we buy a receiver swaption. American swaption so they can exercise whenever.
It than states that it’s close to expiration of swaption ( payer I would assume) and it wants to continue as a floating rate borrower (I see they want this but it doesn’t make sense with exhibit 13).
*** Anyways after exercising Payer swaption we’re locked into paying at 8% receiving LIBOR
In exhbit 13 part B(i) when Swap rate >8%. It says swaption not exercised (Which one?) but then says enter into receiver swaption.
My Reasoning: After exercising Payer swaption (Receive float, pay fixed) there’s no reason to exercise receiver swaption (I know we’re supposed to cancel each other out) but you’re paying 8%(exercise rate) and receiving >8% (Swap rate) from the Payer swaption. Why would we exercise the receiver to pay float at above the exercise rate?