synthetically adding/removing calls from call/noncall debt
- Thread starter SkipE99
- Start date
Adding a call to debt. Purchase a receiver swaption. As rates move down, debt is still outstanding. With callable debt you would call the debt and refinance. Receiver swaption pays higher interest rate than the market rate as rates have decreased. As rates have decreased, you can either sell receiver swaption for PV to another party, settle for PV from swap dealer or enter into offsetting position (pay fixed, receive floating) at market swap rate pocketing difference.
i.e. Buy 5% receiver swaption. Market rates now 3%. I can’t call my debt and issue at 3% but I can enter a swap to pay 3% fixed receive floating and exercise my swaption receive 5% fixed pay floating. Net payments 5% income, 3% outgoing, receive floating, pay floating = 2% and pay 5% on debt. Net debt cost of 3%.
Subtracting a call from debt. Issuer paying higher than market rates based on having call provision in debt. Sell receiver swaption (fixed rate payer) as you think rates are going up. PV of swap offsets value of long call. Rates move down 5% to 3% in the example above. I call my debt, issue at 3% market rate and the swaption is used against me. Rate is still 5% however my effective rate is now the same as if my debt was not callable as I received the swaption payment.
Market rates 5%, I am paying 5.5% because my debt is callable. Sell receiver swaption. PV = .5% over life of loan. Now I am at market rate of 5%. Rates move down to 3%, I call in my debt, refinance at 3%. Receiver swaption exercised against me, I pay 5% receive libor. Enter offsetting swap at market rates, receive 3% pay libor. Net debt expense = 3% on newly issued debt, pay 5% on swap, receive 3% on second swap, pay libor, receive libor. Net effect Pay 5% which is the position I would have been in had I not had a call to begin with.
i.e. Buy 5% receiver swaption. Market rates now 3%. I can’t call my debt and issue at 3% but I can enter a swap to pay 3% fixed receive floating and exercise my swaption receive 5% fixed pay floating. Net payments 5% income, 3% outgoing, receive floating, pay floating = 2% and pay 5% on debt. Net debt cost of 3%.
Subtracting a call from debt. Issuer paying higher than market rates based on having call provision in debt. Sell receiver swaption (fixed rate payer) as you think rates are going up. PV of swap offsets value of long call. Rates move down 5% to 3% in the example above. I call my debt, issue at 3% market rate and the swaption is used against me. Rate is still 5% however my effective rate is now the same as if my debt was not callable as I received the swaption payment.
Market rates 5%, I am paying 5.5% because my debt is callable. Sell receiver swaption. PV = .5% over life of loan. Now I am at market rate of 5%. Rates move down to 3%, I call in my debt, refinance at 3%. Receiver swaption exercised against me, I pay 5% receive libor. Enter offsetting swap at market rates, receive 3% pay libor. Net debt expense = 3% on newly issued debt, pay 5% on swap, receive 3% on second swap, pay libor, receive libor. Net effect Pay 5% which is the position I would have been in had I not had a call to begin with.
deriv108 Wrote:
——————————————————-
> long/short receiver swaption? Can’t explain
> anything…now.
>
> I’m also wondering why not use interest rate
> options directly.
You could, however interest rate swaption market is deeper because the amount of MBS issuers that have lots of vol to sell as rates move up and need lots of vol as rates move down.
(Extension and Contraction risk of their MBS portfolios.)
——————————————————-
> long/short receiver swaption? Can’t explain
> anything…now.
>
> I’m also wondering why not use interest rate
> options directly.
You could, however interest rate swaption market is deeper because the amount of MBS issuers that have lots of vol to sell as rates move up and need lots of vol as rates move down.
(Extension and Contraction risk of their MBS portfolios.)
- Thread starter
- #7
a receiver swaption = call option
if you have a callable bond and you want to remove the call, you want to remove the call option and thus “remove” the receiver swaption. or sell it. so to remove the call you sell the receiver option
if you have a noncallable bond and want to add a synthetic call, you buy the receiver option.
it was not specifically mentioned in the LOS so there is no way they can ask us to calculate this shiz unless they wanna tick me off. i imagine if you memorize this concept you should be able to get the 3 choice mc question down. hopefully lol
if you have a callable bond and you want to remove the call, you want to remove the call option and thus “remove” the receiver swaption. or sell it. so to remove the call you sell the receiver option
if you have a noncallable bond and want to add a synthetic call, you buy the receiver option.
it was not specifically mentioned in the LOS so there is no way they can ask us to calculate this shiz unless they wanna tick me off. i imagine if you memorize this concept you should be able to get the 3 choice mc question down. hopefully lol
goodman2011
New member
- Jun 18, 2026
- 0
- 0
if add , buy reciever swaption
if remove ,sell
if remove ,sell
- Thread starter
- #12
yup and easy…
Brooks was here
Get busy living…or get busy dying
Deriv108, you totally edited and removed your “easy peasy” comment which led directly into my quote continuing a Shawshank Redemption reference. now I just look like an eccentric candidate.
Brooks was here
Get busy living…or get busy dying
Deriv108, you totally edited and removed your “easy peasy” comment which led directly into my quote continuing a Shawshank Redemption reference. now I just look like an eccentric candidate.
goodman2011
New member
- Jun 18, 2026
- 0
- 0
the question is about a debt , I think as a investor ,you need not consider this
goodman2011 Wrote:
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> the question is about a debt , I think as a
> investor ,you need not consider this
. I’m totally…idot..thinking in opposite.
The callable bond issuer holds the “call”. To remove the call, sell it – receiver swaption.
——————————————————-
> the question is about a debt , I think as a
> investor ,you need not consider this
. I’m totally…idot..thinking in opposite.The callable bond issuer holds the “call”. To remove the call, sell it – receiver swaption.
deriv108 Wrote:
——————————————————-
> skip, thanks for clarification…I thought I
> understood month ago, but actually didn’t.
>
> The buyer of a callable bond is like implementing
> a covered call on the bond.
>
> Just buy a call to remove it.
>
> …easy-peasy…
Can’t recall above…never say it again, in AF.
——————————————————-
> skip, thanks for clarification…I thought I
> understood month ago, but actually didn’t.
>
> The buyer of a callable bond is like implementing
> a covered call on the bond.
>
> Just buy a call to remove it.
>
> …easy-peasy…
Can’t recall above…never say it again, in AF.
deriv108 Wrote:
——————————————————-
> goodman2011 Wrote:
> ————————————————–
> —–
> > the question is about a debt , I think as a
> > investor ,you need not consider this
>
>. I’m totally…idot..thinking in opposite.
>
> The callable bond issuer holds the “call”. To
> remove the call, sell it – receiver swaption.
Deriv…I think you’re confusing yourself….If you are buying a callable bond, you are correct, the issuer holds the call. This is A BAD THING for the investor (except for the higher promised yield of course). As the investor, you would want to BUY a call, not sell a call. You already implicitly sold a call when you bought the bond from the issuer.
Edit:
I take that back…in the case where you’re an issuer and you wanted to remove your call option for some reason (in order to pay a lower yield) you’re right, the issuer would sell a call.
——————————————————-
> goodman2011 Wrote:
> ————————————————–
> —–
> > the question is about a debt , I think as a
> > investor ,you need not consider this
>
>
. I’m totally…idot..thinking in opposite.>
> The callable bond issuer holds the “call”. To
> remove the call, sell it – receiver swaption.
Deriv…I think you’re confusing yourself….If you are buying a callable bond, you are correct, the issuer holds the call. This is A BAD THING for the investor (except for the higher promised yield of course). As the investor, you would want to BUY a call, not sell a call. You already implicitly sold a call when you bought the bond from the issuer.
Edit:
I take that back…in the case where you’re an issuer and you wanted to remove your call option for some reason (in order to pay a lower yield) you’re right, the issuer would sell a call.
abushey31, got it…thanks…I understand that the issuer and the investor will take opposite actions to remove/add call options if both use the receiver swaptions.
As goodman said, the Q is about the debt from issuer. So I was wrong on that matter…I shouldn’t think it as an investor. The investor may choose a totally different approach to handle this issue. Thanks.
As goodman said, the Q is about the debt from issuer. So I was wrong on that matter…I shouldn’t think it as an investor. The investor may choose a totally different approach to handle this issue. Thanks.