Which of the following isnot true of a swaption,i.e. ,an option on a swap?
A)A swaption is always less valuable than the underlying swap.
B)A swaption's value is always non-negative.
C)A payer swaption is worth less than a cap with caplets on the same dates as the swap underlying the swaption.
D)A swaption's value increases with interest rate volatility irrespective of which side of the underlying swap one may be on.

Question

Quizplus · Accepted Answer

A swaption is an option,hence is must be worth more than or equal to zero-(b)is correct.A swaption is an option on a portfolio of payments,whereas a cap is a portfolio of options on payments-an option on a portfolio is worth less than a portfolio of options-(c)is valid.Volatility increases the value of any option because of the asymmetry in payoffs,one can always walk away when volatility does not work in the right direction-(d)is valid.Hence,the only invalid statement is (a),because a swap can take negative NPV value,whereas an option is always non-negative in value.

Which of the Following Isnot True of a Swaption,i