In November 2016, Summit sold a
swaption to RBC with a strike rate of 275 bps and an exercise date of June 1, 2018.
calculates the estimated strike price for the
swaption,
Thompson, "Counterparty credit risk pricing and measurement of
swaption portfolios," The Journal of Computational Finance, vol.
Philadelphia's interest-rate swap was bad enough, but in 2004, Northampton County, a rural county in eastern Pennsylvania's Lehigh Valley, sold an interest rate "
swaption" to Merrill Lynch (now Bank of America).
The evolution of the interest rates imposes the use of the derivative tools for hedging the interest risk such as the forward rate agreement contracts, interest rate swap, cross currency swap, cap, floor, collar or
swaption. In order to maintain a high level of competitiveness, the companies in Romania should make investments (including external sources) to achieve the current standards on the European markets and this will lead to the increase of the financial leverage and implicitly of the financial constraints, factor which represented, according to the studies on the non-financial companies, one of the catalyzer of using derivative financial products.
In addition, we re starting to see some of these companies layer in hedges, either in the futures market or, in some cases, buying tail risk in the form of payer "
swaptions," which is a product where you pay a premium and you get a payoff if indeed rates rise at the place you struck the
swaption.
In 2009, for example, the Alabama Public School and College Authority (APSCA) sued to void a
swaption that it had sold to J.P.
After listing payments in the millions that the MBTA makes to different banks for interest rate
swaption agreements that went bad, the group shouted, "Cut off the banks."
In the case of
swaption implied volatilities, US
swaption markets can be temporarily affected by fluctuations in the activity financial institutions need to undertake to hedge their exposure to mortgage pre-payment risk.
Derivatives come in many forms, such as futures, swaps, and options, and can be conducted in combinations (e.g., a
swaption is an option on a swap, and a commodity futures option is an option to enter into a futures contract, etc.) and in numerous strategies, such as caps, floors, straddles, strangles, volatility trades, and so forth.