If I/Client buy a European payer swaption, I understand that I gives me the right to pay the fixed rate at the strike level at maturity and receive a floating rate with an IRS- I expect interest rates to rise.

Is this equivalent to say that a payer swaption is a PUT swaption / option? i.e. right to sell the fixed-to-float swap (and by convention, short a fixed-to-float swap means Client pays the fixed leg / receives floating leg).

By this logic, if I trade a delta-hedged payer swaption, I would expect to be long the payer swaption, and short the underlying - i.e. short the forward fixed-to-float swap -because the delta of a PUT is negative. Is that correct and what will be the directions of the legs of the swap for the hedge?


2 Answers 2


It's a bit confusing to use the terms long and short when it comes to interest rate swaps (it doesn't make much sense to "buy" or "sell" a swap anyway) - particularly in the context of bonds and the inverse price/yield relationship.

Payed or received (always referring to the fixed leg) is better terminology for swaps.

Suffice it to say:

  • Short bond $\equiv$ payed swap $\equiv$ make money when yields rise (prices fall)
  • Long bond $\equiv$ received swap $\equiv$ make money when yields fall (prices rise)
  • payer swaption $\equiv$ call on yield $\equiv$ put on price $\equiv$ put bond option
  • receiver swaption $\equiv$ put on yield $\equiv$ call on price $\equiv$ call bond option

So if you're long a delta-hedged payer swaption: you're long a call on yield (put on price) and the delta-hedge is a received position on the swap ($\equiv$ long position on a bond).

  • $\begingroup$ Very informative, so when people say payer swaption ≡ put swaption it has more to do with a put on price rather than a put on an underlying/swap. I agree, the buy or sell a swap has more sense in the context of deliverable swap futures where you have a BID / OFFER and buying the futures ≡ receiving the fixed leg. I was trying to link the 2 to explain the rationale behind put swaption ≡ payer swaption corporatefinanceinstitute.com/resources/derivatives/…. $\endgroup$ Commented Feb 2 at 21:03
  • $\begingroup$ With bonds being far more ubiquitous, the market terminology is indeed very much from the price perspective - which is probably why you might be partial to thinking of a payer swaption as a put. Indeed, even the terms "market rally" and "market sell-off" can lead to confusions in the rates space. It could leave a novice swaps dealer wondering why they're down pnl on their portfolio of "bought" swaps following a "market rally"! $\endgroup$
    – user35980
    Commented Feb 4 at 13:26

A payer swaption can be thought of as a call on the future swaprate, and is also a put on a bond price (with coupon the swaption's fixed rate).


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