What are swaptions? Is it widely used in Indian Markets?

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Swaptions is an option on swaps. Swaps are interest rates swaps.

Suppose a company A has taken a loan in fixed interest of 14%, but thinks interest rate to go down in future. Thus he can buy swap call option.In call option, he then pays floating rate i.e may be 10% in the future if interest rate go down according to his assumption and receives fix rate i.e 14%.Thus a total gain of 4%.

There are two types of swap option:-

Call option:-Buyer pays floating rate and receives fixed rate.

Put option:- Buyer pays fixed rate and receives floating rate.

Swaptions are mainly used between corporates and banks in India as well as in abroad. Swaptions are not so popular between retail trader in India.

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