Have you ever thought of purchasing or selling anything which give you both-ways profit?
I know you guys are confused what we actually are talking about but yes, in finance, there is an instrument which gives liberty to the owner to make profit irrespective of the any movement in the current market price and this magic stick is called as “STRADDLE”.
Swaption Straddle is actually a combination of the payer & receiver swaptions. It allows its owner to profit based on how much the price of the underlying security moves, regardless of the direction of price movement. A straddle is an option trading strategy that involves buying a put and a call at the same strike price. If the underlying goes up, the call is profitable. If it goes down the put is profitable. If there’s little price movement the premiums likely constitute a loss.
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Continuing with our last post on Swaption, we are here to discuss the “Valuation of Swaption” today. A swaption can be settled in 2 ways as :-
- Physical settlement:- when an option is exercised to go ahead with the underlying Interest rate swap; and
- Cash Settlement:- When an option is exercised for the cash value and the market value of the underlying swap changes hands upon exercise.
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Today, I was thinking, what to write on and was confused whether to discuss on some current market situation or to go with some basic concept again for our finance freshers. And, finally decided to write on SWAPTION, so as to add a thought again to our “back to School Series”.
Swaption was first introduced by William Lawton in 1983 while he was facilitating First Interstate Bank in Los Angeles as the Head Trader for Fixed Income Derivatives.
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