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Swaptions and Options

Virginia Tech Department of Finance Working Paper No. 01-5

28 Pages Posted: 29 Nov 2001  

Don M. Chance

Louisiana State University, Baton Rouge - Department of Finance; Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Date Written: September 24, 2001

Abstract

A swaption is a derivative contract granting the right to enter into a swap. The literature on swaptions is sparse, and only the interest rate swaption has been examined. This paper examines swaptions on equities, currencies, and commodities, exploring a variety of constructions to determine how these instruments are similar to standard options on the underlying asset. It shows that in most cases, swaptions can be shown to be equivalent to a specific quantity of options on the underlying asset. As a result, standard models for pricing options on the underlying can be used to price swaptions. In addition, this paper provides a variation of the Margrabe model for pricing exchange options in which one of the assets is a bond and the other a stock, which is appropriate for pricing equity and currency swaptions.

Keywords: swaptions, options

JEL Classification: G13

Suggested Citation

Chance, Don M., Swaptions and Options (September 24, 2001). Virginia Tech Department of Finance Working Paper No. 01-5. Available at SSRN: https://ssrn.com/abstract=291988 or http://dx.doi.org/10.2139/ssrn.291988

Don M. Chance (Contact Author)

Louisiana State University, Baton Rouge - Department of Finance ( email )

2163 CEBA
Baton Rouge, LA 70803
United States

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Baton Rouge, LA 70803-6308
United States
225-578-0372 (Phone)
225-578-6366 (Fax)

HOME PAGE: http://www.bus.lsu.edu/academics/finance/faculty/dchance/

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