Swaption

A swaption is an option that gives the holder the right, but not the obligation, to enter into an interest rate swap at a specified future date on pre-agreed terms. A payer swaption gives the right to pay the fixed rate and receive floating, while a receiver swaption gives the right to receive the fixed rate and pay floating. Swaptions are used by Indian corporates, banks, and insurance companies to hedge against uncertainty in future interest rate swap requirements — for example, a company expecting to issue floating rate debt in six months may buy a payer swaption to lock in the fixed rate it will pay if it decides to swap the floating rate to fixed. Swaptions are OTC instruments in India and are primarily used by sophisticated institutional participants. They are priced using the Black model applied to the forward swap rate.