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CFA Level I · CFA Level I Exam · Pricing and Valuation of Interest Rate and Other Swaps

A corporation wants the right, but not the obligation, to enter a pay-fixed, receive-floating interest rate swap at a fixed rate of 4.00% in one year. Which instrument does it most likely need to buy?

The corporation should buy a payer swaption. It gives the holder the right, but not the obligation, to pay the fixed rate and receive floating at the set strike. A receiver swaption gives the right to receive fixed, and an FRA is an obligation.

  1. AA payer swaptionCorrect
  2. BA receiver swaption
  3. CA forward rate agreement

Explanation

A payer swaption gives the holder the right to enter a swap paying the fixed rate and receiving floating. A receiver swaption gives the right to receive fixed. An FRA is a binding commitment, not an option.

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