option contract on an interest rate swap. The contract gives the buyer the option to execute an interest rate swap on a future date, thereby locking in financing costs at a specified fixed rate of interest. The seller of the swaption, usually a commercial bank or investment bank, assumes the risk of interest rate changes, in exchange for payment of a swap premium.
option to enter an interest rate swap. A payer swaption gives its purchaser the right, but not the obligation, to enter into an interestrate swap at a preset rate within a specific period of time. The swaption buyer pays a premium to the seller for this right. A receiver swaption gives the purchaser the right to receive fixed payments. The seller agrees to provide the specified swap if called upon, though it is possible for him to hedge that risk with other offsetting transactions.
