The payoff on a payer swaption is equivalent to that of a put option on a bond as described in the question. A payer swaption is the right to enter into a specific swap at some date in the future as the fixed-rate payer at a rate specified in the swaption. If swap fixed rates increase (as interest rates increase), the right to enter the pay-fixed side of a swap (a payer swaption) becomes more valuable. Similarly, when rates increase, bond prices fall and a put option on the bond becomes more valuable. Consider that a put option on a bond gives one a right to sell the bond at a fixed price. One would exercise the put option only if the market price of the bond is lower than the exercise price of the put option. |
