How does a receiver swaption work, and when would an investor use one?

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AcadiFi · Accepted Answer

A receiver swaption gives the holder the right to enter a swap receiving fixed K and paying floating. It profits when swap rates at expiry fall below K - analogous to a put on swap rates.

Payoff: max(K - S_T, 0) x PVBP. If you have the right to receive 5% while the market only offers 4.2%, you capture 80 bps per period on the swap notional.

Use case: Halesden Pension Fund holds $150M of 10-year fixed-rate corporate bonds. They want to lock in a minimum yield for a planned rollover in 18 months. They buy an 18-month receiver swaption at 4.75% on a 10-year swap. If rates fall to 3.80% at expiry, they exercise and receive 4.75% vs market 3.80%, capturing 95 bps annuity x 10 years x PVBP.

Black formula: Receiver = notional x PVBP x [K x N(-d2) - F x N(-d1)].

Put-call parity for swaptions: Payer - Receiver = notional x PVBP x (F - K). This means if F = K (at-the-money forward), payer and receiver have equal value - hedgers sometimes use this to structure zero-cost collars on swap exposure.

Receiver swaptions are also used by insurance companies to hedge long-dated liabilities: if rates drop, their reinvestment risk rises, but the receiver swaption compensates. Similarly, mortgage servicers use receivers to hedge prepayment-driven duration extension.

Important subtlety: 'receiver' refers to receiving fixed on the underlying swap, not receiving any option premium. The buyer always pays premium up front.

How does a receiver swaption work, and when would an investor use one?

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