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Have a logical question - let me paint a picture.

I have a 1y5y5y Midcurve Payer Swaption, and at Expiry the swaption is ITM (say the 5y5y rate is 4% and my strike is 3%).

then 5 years after expiry (6y since we bought the swaption), the actual 5y rate is 2%.

Do we decide to enter into the forward starting swap at expiry of the option (i.e 1 year), and even thought the fwd rate was 4% at expiry, when 5 years passes, and the 5y spot rate is 2%, we are still paying 3%(obviously making a loss), or do we have up until the actual start of the swap(in 6 yrs) to decide if we want to enter.

thanks.

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  • $\begingroup$ Does the term sheet say explicitly whether the maturity of the underling swap is 5Y from swaption exercise date, or something else? $\endgroup$
    – Dimitri Vulis
    Commented Jan 8, 2023 at 13:48

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Decide at 1year.

At 6y, if you close out, you lost , but if you stay with it , then you might be lucky and rates rise and you end up making money

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  • $\begingroup$ Got it - so another follow up, if I'm paying Forward premium for the Mcurve swaption, would I pay the premium at the 1 year mark(option expiry) or at the 6 year mark(when the swap actually starts)? $\endgroup$
    – purr
    Commented Dec 11, 2022 at 1:35
  • $\begingroup$ at 1year (option expiry) $\endgroup$
    – Randor
    Commented Dec 20, 2022 at 20:42

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