Hi,I have a quick question about Swaptions.(1) Is an option to borrow fixed at a swap rate for 5 years in 2years time a Swaption or just a an option on a bond??I have some examples of Receiver/Payer Swaptions. In these cases they either are options to (2) "issue a five year bond paying the swap rate" <- Pay Fixed, receive floating = Payer Swaption (3) "buy a a five year bond paying the swap rate" <- receive floating, Pay Fixed = Payer SwaptionCan someone tell me what the the difference between (1) & (2) is?To me, it feels like they are both paying fixed and receiving float???? Thanks

They 're equivalent:Swaptions can be viewed as bond options with par strike priceRegardsP.

Thanks, I thought they were equivalent also. Could you tell me what is the distinction between the below two questions are so? In my mind, they are both two year options, that pay fixed and receive floating?...However....with 1 do we receive floating also?? (1) What is the price of an option to borrow fixed at this swap rate for five years in two years?(2) What is the price of a two-year option to issue a five-year bond paying the swap rate at par?Thanks

I may not be understanding what you are asking, but when you say(2) What is the price of a two-year option to issue a five-year bond paying the swap rate at par?If you mean the then-par swap rate observed two years out, well the value of this option would be zerobecause a par swap rate observed two years out has zero net present value, that's the definition of apar swap.

You can't treat an option to issue as a swaption. As with any lending commitment, the cost of the loan would need to take into account the issuer credit and the cost of lender's funding. The later has been a lot more obvious in recent economic conditions. In the current environment, the cost of funding may very well be a bigger part of the overall yield than the swap rate. When it comes to an option of course, you need to recognize that both credit and funding costs are stochastic and likely to be negatively correlated to the swap rate. You also need to recognize that it's hard to delta hedge credit and VERY hard to delta hedge funding.