Swaption

CFA Level II Derivatives
#1

Hi fellow members

can someone please explain how long payer swaption is not same as short receiver swaption.

alternatively if you can explain the following

a long callable bond can be replicated using a long option free bond plus a short receiver swaption.

regards

Sunil

#2

When you short you are option writer when you long you are option holder

When u have callable bond you essentially have a straight bond and short call option… Call will be exercised by counter party when rates in the market go down… the holder of call option benefits from lowering of rates and essentially is similar to holding a receiver swaption which will also be exercised by him when rates in a market go down so he receives the agreed fixed higher rate than the market rate

#3

Thanks i guess in this case the long callable bond is from a holder/investor perspective instead of issuer perspective?

Isn’t the long payer swaption will be paying at fixed rate and which will be same as short receiver swaption ?

#4

Yes call option with issuer

Long payer swap is similar to short receiver swap but swaption is different its the option with the holder… Which is not an obligation but a right