Payer swaption?

[BMiller12]

The text says a payer swaption is like a protective put in that it allows the holder to pay a set fixed rate even if rates have increased. Wouldn’t that be more like a call than a put? I tend to think of using puts to protect against falling rates? At least that’s how typical interest rate puts we’re described.

 

[cpk123]

protective put -> long put + long underlying.
together that position (combined) = long call. (look at the picture) —–/

 

[tribeca_regent]

a protective put on interest rates would protect against falling rates only for the lender.
the borrower would love falling rates.
keep in mind the position (short/long) and u/l (fixed income / interest rate).

 

[BayStreet]

it’s a protective put because you ‘put’ a fixed rate bond on the investor and you’re paying them fixed rates and receiving floating. You’d do this when rates rise since your swaption would be in the money (remember the swaption was priced at a flatter spot curve). the gain on the swaption would offset some of the loss on a portfolio due to the rising rates