Swaption (Swap Option)

A swaption (a portmanteau of swap and option) is an option on a swap (cf.). In an interest-rate swaption, a counterparty pays an option premium for the right to enter into a swap transaction with a notional amount, expiry, and set fixed/floating legs. In a payer swaption, the counterparty has an option to pay the fixed-rate leg. In a receiver swaption, the counterparty has an option to receive the fixed-rate cash flows.