Buying a payer swaption vs writing a receiver swaption

krombaa Wrote:
——————————————————-
> daveyc18 Wrote:
> ————————————————–
> —–
> > that’s why the long has credit risk, because if
> > the short defaults, the long loses. credit risk
> in
> > this context means the risk of not getting paid.
>
> >
> > example:
> >
> > it’s like you give $ for this payer swaption,
> IR
> > goes up, which is good for you. but i’ve been
> > spending $ like crazy and i;m now broke, so i
> > can’t pay up. i got your money, ran with it,
> and
> > now i can’t pay. so you lose in this case.
>
>
> The short can have credit risk too! Imagine that
> the long excersices his swaption (since interest
> rates have gone up). You pay lower fixed and get
> higher floating, and hence you are making money.
> Imagine, however, that interest rates suddenly
> drop below the fixed rate u pay (after, of course,
> you have excercised ur in the money swaption). Now
> the short of the contract is making money
> (receives high fixed, pays low float). The short,
> therefore, bears credit risk (the risk that YOU
> default on your payments to him).
The short doesn’t have credit risk because it won’t receive payment at maturity/exercise whether the option is in or out of the money. The payment the short receives is the premium, so he got paid already; hence, no credit risk.
As somebody else mentioned earlier, it’s unilateral credit risk.
 
those who think that buying a payer option and writing a reciever option are the same thing, need to go back and read everything in derivatives cos you have understood nothing.
there is a huge difference.
 
You do not benefit when rates increase writing a receive option any more than you do when rates stay flat. It is a view that rates won’t go down beyond a level at which your swap payments cost you more than the premium figure, not a view that rates will increase.
 
deepstack31 Wrote:
——————————————————-
> those who think that buying a payer option and
> writing a reciever option are the same thing, need
> to go back and read everything in derivatives cos
> you have understood nothing.
>
> there is a huge difference.
can you explain it to us Mr. Genius?
 
efitzpat Wrote:
——————————————————-
> You do not benefit when rates increase writing a
> receive option any more than you do when rates
> stay flat. It is a view that rates won’t go down
> beyond a level at which your swap payments cost
> you more than the premium figure, not a view that
> rates will increase.
Because if you write a receive swaption and the rates increase then the buyer won’t exercise and so your profit will be limited to the premium you received. Now I see your point. Thanks
So for the test what do you do? Buy payer or write receiver?
 
It’s like buying a call vs. selling a put. Both a long call and a short put result in a gain when the underlying increases in value, but other sensitivities (e.g. vega) have opposite signs, and only the long position has credit risk.
 
Writing a receiver option doesn’t really do sh!t to help hedge your exposure. As others mentioned you are simply receiving the premium payment, akin to selling a put or call on an equity position. If rates go the wrong way then you could be flat out fu$&ed depending on your exposure. If you want to effectively hedge your exposure with a single contract you really need to BUY the option/swaption.
 
rjs157 Wrote:
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> did y’all buy protection on the iTraxx index?
buy receiver
 
separate q….credit spreads were widening and the investor was concerned with deteriorating credit quality of iTraxx Index members….buy CDS protection on this, i think? anyone?
 
yes, if you feel credit spreads will continue to widen (deteriorate) you would go long CDS protection. and sell protection for a good credit risk
 
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