Friday, April 3, 2009

options on swaps

following on the success of caps ,it did not take financial markets long to develop the options on swaps derivative.these instruments offer an enormous amount of flexibility in corporate finance transactions.Just as you would expect ,these financial contracts give the buyer the option to enter into a future swap or right to cancel a future swap .in the first case (some times referred to as a "swapping"),Purchasing a call option gives the buyer the right to receive a fixed rate in a swap and pay a floating rate .Purchasing a put option gives the buyer the right to pay fixed rate in the swap and receive a floating rate .In contracting for the option to cancel a swap,buying a call option (a callable swap ) gives the side paying a fixed and receiving a floating rate the right to cancel .In purchasing a put option to cancel (a put able swap ),the buyer paying the floating rate and receiving the fixed rate has the right to cancel.

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