instruments in interest-rate, currency and ... - Volksbank AG
instruments in interest-rate, currency and ... - Volksbank AG
instruments in interest-rate, currency and ... - Volksbank AG
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SWAPTIONWhat is a swaption?Aga<strong>in</strong>st the payment of an option premium a swaption gives an option buyer the right to execute, at adeterm<strong>in</strong>ed po<strong>in</strong>t <strong>in</strong> time, a swap specified relat<strong>in</strong>g to its term <strong>and</strong> <strong>in</strong>terest <strong>rate</strong>.Swaptions on the one h<strong>and</strong> enable the party to pay a fixed <strong>in</strong>terest <strong>rate</strong> (purchase of a payer swaption), e.g.for hedg<strong>in</strong>g liabilities aga<strong>in</strong>st ris<strong>in</strong>g <strong>in</strong>terest <strong>rate</strong>s.On the other h<strong>and</strong>, the swaption enables the party to get a fixed <strong>in</strong>terest <strong>rate</strong> (purchase of a receiver swaption),e.g. for hedg<strong>in</strong>g assets aga<strong>in</strong>st fall<strong>in</strong>g <strong>in</strong>terest <strong>rate</strong>s.Determ<strong>in</strong>ants of a swaptionn Currency <strong>and</strong> nom<strong>in</strong>al amountn Term to maturity: between 2 <strong>and</strong> 10 yearsn Term of the option: between 1 day <strong>and</strong> 10 yearsn Strike price: fixed <strong>in</strong>terest <strong>rate</strong> of the underly<strong>in</strong>g <strong>in</strong>terest swapn Option premium: depend<strong>in</strong>g on market situation <strong>and</strong> strike priceApplicationsnTo hedge project f<strong>in</strong>anc<strong>in</strong>g operations, for example <strong>in</strong> connection with bids submitted for a tender<strong>in</strong>vitation. This enables the party to offer the f<strong>in</strong>anc<strong>in</strong>g for an offer of goods <strong>and</strong>/or services simultaneouslywithout <strong>in</strong>curr<strong>in</strong>g an <strong>in</strong>terest-<strong>rate</strong> risk <strong>in</strong> the event of them fail<strong>in</strong>g to be awarded the contract. In addition,the swaption may not have lost value <strong>in</strong> the event of the loss of the contract. Depend<strong>in</strong>g on what happenedon the market, the value of the swaption can even exceed the price orig<strong>in</strong>ally paid. Swaptions are alsofrequently used for hedg<strong>in</strong>g <strong>in</strong>terest expense <strong>in</strong> the case of f<strong>in</strong>ance for planned acquisitions.nTo hedge planned f<strong>in</strong>ance operations. If, for example, a EUR loan is due <strong>in</strong> 12 months, the borrower canhedge the risk of ris<strong>in</strong>g <strong>in</strong>terest <strong>rate</strong>s for the subsequent issuance by means of a swaption.On the exercise date, for example, the purchaser of the payer swaption has two choices:– Market <strong>in</strong>terest <strong>rate</strong>s of a swap are higher than the strike price of the swaption – the option will beexercised. The party takes over the swap <strong>and</strong> thus secures an <strong>in</strong>terest <strong>rate</strong> below current market <strong>rate</strong>s atthe level of the strike price.– Market <strong>in</strong>terest <strong>rate</strong>s fall short of the swap underly<strong>in</strong>g the swaption – the party will not exercise the option<strong>and</strong> will f<strong>in</strong>ance at current market conditions.– The actual cost of the loan comprises of the total of the cost of the f<strong>in</strong>ance plus the premium for theannualised option.32
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