Which of the following is true?
A) A swaption that gives the holder the right to pay fixed is equivalent to a call option on a bond
B) A swaption that gives the holder the right to pay fixed is equivalent to a put option on a bond
C) A swaption that gives the holder the right to pay fixed is equivalent to a put option on one bond combined with a call option on another bond
D) None of the above

Question

Quizplus · Accepted Answer

A swaption that gives the holder the right to pay fixed is equivalent to a put option on a bond. This is because the holder has the right, but not the obligation, to enter into a fixed-rate swap, and this right has value. This value is similar to the value of a put option, which gives the holder the right, but not the obligation, to sell an underlying asset at a fixed price. The swaption holder could exercise the option if interest rates rise, allowing them to pay a fixed rate that is lower than the market rate.

Which of the Following Is True