It sounds like the name of the dashing options trader who becomes Archie's rival for a four-episode arc on Riverdale. But, no, a call swaption is a clever name that only finance people could come up with to refer to a combination of an interest rate swap and an option.
This strategy involves a player (usually a bank or large corporation) who wants to have the ability to hedge against falling interest rates. Borrowers who have a floating interest rate can swap with another party to a fixed rate to make costs more predictable. Or they can take advantage of lower interest rates and swap a fixed interest rate for a floating one. The option part comes in because it gives the holder the right to enter into a swap agreement as the floating rate payer and the fixed rate receiver.
A strike price of the option is established, (the price at which action will be taken), an expiration date, and the fixed and floating rates. Once the strike price is reached, the fixed interest rate can be swapped for a floating interest rate.
If this sounds like a lot of gibberish, an example here might be helpful. Let's say Knowitall University is watching the market closely and expects interest rates to fall. They have a large amount of fixed interest rate debt and want to hedge, so they can take advantage of the falling interest rates. So they enter into a call swaption to convert its fixed rate debt to a floating rate for the duration of five years. Now they can pay a variable interest rate on their debt (which they hope means the rate will go lower). If interest rates rise, they will lose out.
Related or Semi-related Video
Finance: What is a Strike Price?40 Views
Finance a la shmoop what is a strike price well before going
even a second further with this video be sure you've seen our Steven Spielberg [Introduction to a movie at the cinema directed by Steven Spielberg]
directed what is a stock option video here are the reviews from variety.. well
to review a stock option is the right to buy a share of stock for a set price
over a given period of time so let's say you were granted an option to buy a [Graph of amazon stock prices]
share of Amazon stock in 2015 when the stock was around 400 bucks a share the
option lasts as long as you work at the company in good standing or after 10
years have passed which ever ends first well one day you decide you want another job [Woman signing a contract]
your contract says that if you're no longer an employee with the company then
you have 90 days in which to either buy out your option that is to buy the
option and then own the stock or just forfeit the option [Woman underlining words on a contract]
well since Amazon is now at a thousand bucks a share you obviously don't want
to forfeit the option to buy that share of stock for 400 bucks but you note that
your many friends who joined apcray.com at a high price a high strike price which
creators know they're stock while they're doing a lot of option forfeiting
that is their options ended up being worthless so you've got a lot to think [Man holding out a bag of dog poo]
about here this is Amazon not apcray so you want to buy out your option so
what happens well you were granted your own options at the price Amazon stock [Amazon box falls off shelf]
was trading at the day you joined the company it was 400 bucks a share so
that's a strike price that $400 is the price you pay to buy a share of stock at
some point there in the future that strike price has nothing to do with [Protestors holding signs outside an Amazon building]
unions not working got it? all right well in order to buy that stock it's
currently trading in a thousand bucks a share
you pay Amazon 400 bucks and that buys out your option you then own the stock [Man writing a check to Amazon for 400 dollars]
that's it Amazon cancel your option then they give
you a share of actual stock which you now own for as long as you want to own [Man delivering an Amazon box]
it you can sell it immediately and make a
$600 a share profit that's a thousand bucks a share it's trading at now minus the
$400 strike price you just paid to buy out that option got it or you can hold [Grandparent bribing grand-daughter for amazon stock]
onto those shares and you know use it to bribe your grandchildren one day it's
worth like a million dollars a share
Up Next
What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...
What is a call option? A call option is a type of contract that lets the investor buy shares of a stock at a certain price and within a window of t...