The fixed-rate receiver in a plain vanilla interest rate swap has a position equivalent to a series of: A)
long interest-rate puts. B) short interest-puts and long interest-rate calls. C)
long interest-rate puts and short interest-rate calls. The answer is C. Can somebody please explain how is it C and why not B.
Under what circumstances (rising rates or falling rates) does the fixed-rate receiver gain?
Under what circumstances (rising rates or falling rates) does the fixed-rate receiver lose?
Fixed rate receiver gains when the rates are falling. Fixed rate receiver losses when the rates are rising.
Now, under what circumstances does a long interest rate put gain?
A short interest rate put?
A long interest rate call?
A short interest rate call?
Oh I am not sure about that. I think short interest rate call, am I right. When I long interest rate put, I am having the right to sell a specific interest rate, is that correct? Hence, in order for me to gain, the other party should be in the opposite position, that means, short interest rate call, I am not sure if this the right way to think about this, please help me.
An interest rate call option pays the market rate less the strike rate, so the long position (the owner of the option) will exercise it only when the market rate at expiration is higher than the strike rate.
An interest rate put option pays the strike rate less the market rate, so the long position (the owner of the option) will exercise it only when the market rate at expiration is lower than the strike rate.
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Understood that now. Thanks a lot.
My pleasure.