Swaption is an agreement to make a future deal on pre-agreed terms. However, it is rather an opportunity to conclude a transaction at a certain point, but not an obligation.
Depending on the terms of the transaction in the future, swaptions are divided into:
- American — a deal can be made within the agreed period of time;
- Bermudan — a deal can be made on specific dates;
- European — there is an agreed day to make a deal.
Call swaption is a swap that provides the buyer the right to be a payer at a fixed rate (exchange rate); he will be paid at a floating rate.
Put swaption is a swaption that provides the buyer the right to be a payer at a floating rate; at the same time, he will be paid at a fixed rate.
Straddle swaption is a swaption that provides the buyer the right to choose whether to be a payer at a floating or fixed rate in the future.