International Finance

Lecture 6

Page 1
World Financial Markets and
Institutions

International Banking and Money

Market
International Bond Market
International Equity Markets
Futures and Options on Foreign
Exchange
Currency and Interest Rate Swaps
International Portfolio Investment

Page 2
 Futures Contracts
A futures contract specifies that a certain currency
will be __________ for another at a specified time in
the future at prices specified today.
A futures contract is different from a forward
contract:
Futures are standardized contracts trading on
organized exchanges with daily resettlement
through a clearinghouse.
Standardizing Features:
__________ Size
__________ Month
Daily __________
________ requirements (initial, maintenance margins)
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Currency Futures Markets
The Chicago Mercantile Exchange (CME)
is by far the largest.
Others include:
The Philadelphia Board of Trade (PBOT)
The MidAmerica Commodities
Exchange
The Tokyo Financial Exchange
The London International Financial
Futures Exchange (LIFFE)

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 After Hours Trading
__________ -hours trading on CME GLOBEX
runs from 2:30 p.m. to 4:00 p.m dinner
break and then back at it from 6:00 p.m. to
6:00 a.m. CST.
Singapore Exchange (SGX) offers contracts.
There are other markets, but none are close
to CME and SGX trading volume.

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Daily Resettlement: An
Example
Suppose you want to speculate on a rise in
the $/ exchange rate (specifically you think
that the dollar will appreciate).

Currently __________. The 3-month forward price is __________.

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 Daily Resettlement
Currently $1 = 140 and it appears that the
dollar is strengthening.
If you enter into a 3-month futures contract to
sell at the rate of $1 = 150 you will make
money if the yen depreciates. The contract size is
12,500,000
You do not have to have now, either way you
have committed yourself to sell 12,500,000 and
receive in exchange 12,500,000 * 1/150 [$/ ] =
$ _________
Your initial margin is 4% of the contract value:

Page 7
 Daily Resettlement
On Thursday the futures rate closes at $1 = 149,
then your positions value drops. Heres why.
Your have a short position in . The mark-to-market
profit/loss for short position is_______.

That is, you have lost $ ________overnight

The $559.28 comes out of your $3,333.33 margin
account, leaving $2,774.05

Page 8
 Reading a Futures Quote

Daily Change Highest and lowest

prices over the
Closing price lifetime of the
Lowest price that day contract.
Highest price that day
Opening price
Expiry month Number of open contracts
Page 9
Currency Futures Trading:
Example
$CAN futures contract expiring on June 14 trades on CME at
US$0.7761 on January 9. On the last trading day of the contract
in June the spot rate is US$0.7570. The contract size is
CAN$100,000.
1. What is the profit/loss for a trader who took a long position in the
contract on January 9?
2. What is the profit/loss for a trader who took a short position in the
contract on January 9?

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Currency Futures Trading:
Example

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 Eurodollar Interest Rate Futures
Widely used futures contract for hedging short-term
U.S. dollar interest rate risk.
The underlying asset is a $1,000,000 90-day
Eurodollar depositthe contract is __________.
Traded on the CME and the Singapore International
Monetary Exchange.
Eurodollar futures prices are stated as an index
number of three-month LIBOR calculated as F =
100 LIBOR.
For example, if the closing price F is 98.23, the
implied yield is 5.77 percent = __________
Hedging/speculation just like with forwards, except
standardized
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amounts and daily resettlement
 Example
The size of a yen futures contract at CME is 12.5 million
yen. The initial margin is $2,025 per contract and the
maintenance margin is $1,500. You decide to buy ten
contracts with maturity on June 17, at the current
futures price of $0.01056. Today is April 1 and the spot
rate is $0.01041. Indicate cash flows on your position if
the following prices are subsequently observed.

April 1 April 2 April 3 April 4 June 16 June 17

Spot, $/Y 0.01041 0.01039 0.01000 0.01150 0.01150 0.01100
Futures, $/Y 0.01056 0.01054 0.01013 0.01160 0.01151 0.01100

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 Example solved
April 1 April 2 April 3 April 4 June 16 June 17
Spot, $/Y 0.01041 0.01039 0.01000 0.01150 0.01150 0.01100
Futures, $/Y 0.01056 0.01054 0.01013 0.01160 0.01151 0.01100
Gain/Loss
Margin before CF

CF from investor
Margin after CF

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Example
It is 1 April now and current 3-month LIBOR is 6.25%.
Eurodollar futures contracts are traded on CME with size of
$1 million at 93.280 with June delivery. The initial margin is
$540 and the maintenance margin is $400. You are a
corporate treasurer and you know your company will have
to pay $10 million in cash for goods that will be delivered on
June 17. You will sell the goods for profit, but you will not
receive payment until September 17. Thus, you know you
will have to borrow $10 million for 3 months in June.
1. What is the forward rate implicit in the Eurodollar futures
price?
2. How to lock in 3-month borrowing rate for June 17 using
Eurodollar futures?
3. On June 17, the Eurodollar futures is quoted at 91%, and the
current Eurodollar rate is 9%. You close your position at that
time. What are your cash flows?
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Example solved
1. Implicit rate = __________ = __________ Note that forward
rate 6.72% > spot 6.25%, term structure __________ sloping
2. You will have to borrow $10 million for 3 months as you
know. Borrow = __________ instruments. Borrow in the
future and lock in the % rate = __________. You __________
Eurodollar contracts.
3. Interest rates ____________________
Your profit from the short position in the futures contracts
is ______________________________.
Your borrowing cost is _______________________
Your total borrowing CF = _______ _______ = $168,000.
For 3 months borrowing you pay ________ __________ =
1.68% Convert this into per annum: __________________
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Options Contracts
An option gives the holder __________, but not the
obligation, to buy or sell a given quantity of an asset
in the future, at prices agreed upon today.
Call vs. Put options. Call/Put options gives the holder
the right, to buy/sell a given quantity of some asset at
some time in the future, at prices agreed upon today.
European vs. American options.
European options can only be exercised __________
expiration date. American options can be exercised
at any time up to and including the expiration date.
Since this option to exercise early generally has
value, American options are usually __________ than
European options, other things equal.

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 Options Contracts
In-the-money options
Profitable to exercised __________
At the money options
Profit = 0 if exercised __________
Out of the money options
__________ if exercised under the options
terms
Intrinsic Value
In the money: The difference between the
exercise price of the option and the spot price of
the __________ asset.
Out
Page 18 of the money: __________
Currency Options Markets
Currency
20-hour trading day.
__________ is much bigger than exchange volume.
Trading is in six major currencies against the U.S. dollar.
View standard specifications from PHLX
Options on currency futures
Options on a currency futures contract. Exercise of a
currency futures option results in a long futures position
for the ________of a call or the __________of a put.
Exercise of a currency futures option results in a short
futures position for the __________ of a call or the
__________ of a put.
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Basic Relationships at Expiry
At expiry, an American call option is worth the
same as a European option with the same
characteristics.
If the call is in-the-money, it is worth __________
If the call is out-of-the-money, it is __________.
CaT = CeTput
American
At expiry, an = Max[S - E,
optionT is 0] the same
worth
as a European option with the same characteristics.
If the put is in-the-money, it is worth _______
If the put is out-of-the-money, it is _______.
PaT = PeT = Max[E - ST, 0]

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 Basic Option Profit Profiles
Call. Long position (_____). If the call is in-the-
money, it is worth ST E. If the call is out-of-the-
money, it is worthless and the buyer of the call
loses his entire investment of c0.
Call. Short position (_____). If the call is in-the-
money, the writer loses ST E. If the call is out-of-
Put. Long position
the-money, (______).
the writer keepsIf the
the option
put is in-the-money,
premium.
it is worth E ST. If the put is out-of-the-money, it is
worthless and the buyer of the put loses his entire
investment of p0.
Put. Short position (______). If the put is in-the-money,
it isPage
worth
21 E ST. If the put is out-of-the-money, it is
American Option Pricing

With an American option, you can do

everything that you can do with a
European optionthis option to exercise
early has value.
CaT > CeT = Max[ST - E, 0]
PaT > PeT = Max[E - ST, 0]

Page 22
Market Value, Time Value and
Intrinsic Value for an American
Call
The black line shows
the _________ at
maturity (not profit) of
a call option.
Note that even an out-
of-the-money option
has value
__________________.

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Example
Calculate the payoff at expiration for a call option
on the euro in which the underlying is $0.90 at
expiration, the option is on EUR 62,500, and the
exercise price is
1. $0.75
2. $0.95

Page 24
Example
Calculate the payoff at expiration for a put option
on the euro in which the underlying is $0.90 at
expiration, the option is on EUR 62,500, and the
exercise price is
1. $0.75
2. $0.95

Page 25
Example
Calculate the payoff at expiration for a call option on
a currency futures contract in which the underlying is
at $1.13676 at expiration, the futures contract is for
CAN$1,000,000 and the exercise price is:
1. $1.13000
2. $1.14000

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Example
Calculate the payoff at expiration for a put option on
a currency futures contract in which the underlying is
at $1.13676 at expiration, the futures contract is for
CAN$1,000,000 and the exercise price is:
1. $1.13000
2. $1.14000

Page 27
Pricing currency options
Bounds on option prices are imposed by arbitrage
conditions (ignore in this course)
Exact pricing formulas (theoretical)
Lattice models, for example binomial model
(ignore for now)
Pricing based on continuous time modeling and
stochastic calculus (mathematics used in
modeling heat transfers, flight dynamics, and
semiconductors). No derivations here. More
_________ than binomial.
Idea: model evolution of the underlying assets
price in ____________ time (i.e. not week-by-
week) and calculate expected value of the
option payoff.
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Currency Option Pricing
rdomestic T
Callt 0 [ F0 N (d1 ) E N (d 2 )] e
Put t 0 [ E N (d 2 ) F0 N (d1 )] e rdomestic T
( rdomestic r foreign )T r = the interest rate (foreign or
F0 S 0 e domestic), T time to expiration,
years
ln( F0 / E ) 0.5 2T S current exchange rate, E
d1 ,
T exercise exchange rate, DC/FC

d 2 d1 T

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Example
Consider a 4-month European call option on GBP in the US.
The current exchange rate is $1.6000, the exercise price is
$1.6000, the riskless rate in the US is 8% and in the UK is
11%. The volatility is 20%. What is the call price?

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Example
Consider a 2-month European put option on GBP in the US.
The current exchange rate is $1.5800, the exercise price is
$1.6000, the riskless rate in the US is 8% and in the UK is
11%. The volatility is 15%. What is the put price?

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Put-call parity for currency
options

rdomestic T r foreign T
Call E e Put S 0 e

Page 32
 Option Value
Determinants
Call Put
1. Exchange rate
2. Exercise price
3. Interest rate at home
4. Interest rate in other country
5. Variability in exchange rate
6. Expiration date

The value of a call option C0 must fall within

max (S0 E, 0) < C0 < S0.
The precise position will depend on the
above factors.
Page 33
 Empirical Tests
The European option pricing model works fairly
well in pricing American currency options.
It works best for ______________ and
_______________ options.
When options are in-the-money, the European
option pricing model tends to _____________
American options.

Page 34
World Financial Markets and
Institutions

International Banking and Money

Market
International Bond Market
International Equity Markets
Futures and Options on Foreign
Exchange
Currency and Interest Rate Swaps
International Portfolio Investment

Page 35
 Preliminaries
In Corp Fi we learn how to package debt
and/or equity financing (_____________).

Now assume that we have done so, i.e., the

optimal capital structure is in place. For a
MNC this is a _________________________
securities denominated in different
currencies with some being ________________.

Question: How a non-financial corporation

can manage this complex exposure?
Risk exposures
MNEs are exposed to a variety of risks:
Interest rate
Currency
Business Cycle
Inflation
Commodity
Industry
We have so far focused only on currency risk.
Now extend to _____________________
Both asset and liability sides of a MNC is
exposed to it (think of ____________ and _____
that MNEs hold on the _____________).
 Risk exposures
Corporate floating-rate loans are the dominant
financing instrument
Two types of risks with loans:
Credit risk:

Re-pricing risk:

Task is to measure the impact of the risks on the cost

of debt and come up with suitable hedging strategy
Motivation for Swaps
A UK firm wants to convert
______________ into ________________ to
offset its revenues from US sales
The UK firms alternatives include
A ___________ in US dollars
A ____________ that trades floating-
rate debt for the fixed-rate $ debt
of a U.S. company
Parallel Loan

British
Citigroup Ford HSBC
Petroleum

BPUS FordUK

Page 40
Parallel loans provided
access
to
new
Parallel capital
loan: Borrow inmarkets
________________ and
then trade for the debt of a foreign
counterparty
Provided access to new capital markets
Legally _________________ on cross-border currency
transactions
Provided ___________________ for foreign
subsidiaries
May lower the firms _________________
Problems with parallel
loans
The foreign counterparty may
have _______________
Parallel loans ___________________
on the balance sheet
Search costs can be _______
The swap contract
Solution: Package the parallel
loans into a single legal agreement
called the ______________
Reduced the default risk of parallel
loans via the _______________ (if one
party defaults, the other is
automatically freed from its obligation)
Swaps _____________________ on the
balance sheet
High swap volume led to ___________
Development of the swaps
market
1981
______________ engineers the first currency
swap between the _____________ and _____
Early 1980s
Customized, low-volume, high-margin deals
Late 1980s and 1990s
Commercial and investment banks begin to
serve as swaps dealers
Swaps turn into a ___________, ____________,
_____________ business
Volume and liquidity grow
 Swap Market
In 2001 the notional principal of:
Interest rate swaps was $58,897,000,000,000.
Currency swaps was $3,942,000,000,000
The most __________ currencies are:
US$, JPY, Euro, SFr, GBP
A ___________ is a generic term to describe a
financial institution that facilitates swaps
between counterparties. It can serve as either a
broker or a dealer.
A broker ___________ counterparties but does not assume
any of the risks of the swap.
A dealer ____________ to accept either side of a currency
swap, and thus may assume exchange rate risk.
Page 45
 Size of the Swap
Market

Page 46
Swaps

A swap is an agreement to
exchange cash flows at
___________________ according to
certain specified rules (traded on
OTC)
Notional Principal
Counterparties: _________ and
________________ (market makers)
Swaps
Interest Rate Swaps

Currency Swaps

Basket Swaps swap a currency

for a weighted basket of other
currencies. The basket is chosen
to _________________ of a MNC.
Interest rate swaps

Interest rate swap

Similar to a currency swap, but cash
flows in a _____________ are exchanged
A _________________ is paid during the
life of the swap
The __________________ is not usually
swapped
An Example of a Plain
Vanilla Interest Rate Swap
An agreement by Microsoft to _________
___________ & pay a _______________
every 6 months for 3 years on a
notional principal of $100 million
Next slide illustrates cash flows
Note that in practice Fixed Rates are on
__________ or __________ basis whereas
Floating Rates are on _________ basis.
Cash Flows to Microsoft

---------Millions of Dollars---------
LIBOR FLOATING FIXED Net
Date Rate Cash Flow Cash Flow Cash Flow
Mar.5, 2008 4.2%
Sept. 5, 2008 4.8% +2.10 2.50 0.40
Mar.5, 2009 5.3% +2.40 2.50 0.10
Sept. 5, 2009 5.5% +2.65 2.50 +0.15
Mar.5, 2010 5.6% +2.75 2.50 +0.25
Sept. 5, 2010 5.9% +2.80 2.50 +0.30
Mar.5, 2011 6.4% +2.95 2.50 +0.45
Typical Uses of an
Interest Rate Swap
Converting a liability from
_______________________
_______________________
Converting an investment
from
_____________________
_____________________
Banc One Swaps
Backus, Telmer and Clapper (94)
describe Banc Ones use of interest rate
swaps.
According to Bankers Magazine 1991,
Banc One viewed itself as McDonalds of
retail banking :
80s and 90s saw its rapid growth through
acquisitions of banks all over US
Franchises were decentralized which led to
___________________________________ =>
_______________________________.
Banc One Swaps
Backus, Telmer and Clapper (94)
computed the exposure:
1% drop in interest rates in early 90s
would lead to ______________________
Solution by Banc One:
___________________________, mostly
______, with notional principal = $40 bil.
How does it work?
Example:
If assets are ________ to R => financing
with fixed-rate debt __________________
This is because firms bottom line is
_____________________ (long in a riskless
security and short in a risky)
What happens: _______ => _______ =>
___________.
Hedge by a swap: _____________ &
________________.
Back to Intel and Microsoft
(MS) Transform a Liability

5.2%
Intel MS
LIBOR+0.1%
 A Dealer is Involved

5.2%
Intel MS
LIBOR+0.1%
The Comparative
Advantage Argument
AAACorp wants to borrow __________
BBBCorp wants to borrow __________
Swap Dealer will charge 4 basis points.

Fixed Floating
AAACorp 10.00% 6-month LIBOR + 0.30%
BBBCorp 11.20% 6-month LIBOR + 1.00%
The AAA-BBB Swap when a
Financial Institution is
Involved
10%
AAA F.I. BBB
LIBOR+1%
The Comparative
Advantage Argument
We are not comparing ____________,
rather _________________ from a
single companys point of view:
AAA Corp has a comparative advantage
in _________________ markets
BBB Corp has a comparative advantage
in ______________ markets

Page 60
 Criticism of the
Comparative Advantage
Argument
The 10.0% and 11.2% rates available to AAA
Corp and BBB Corp in fixed rate markets are
_________________
The LIBOR+0.3% and LIBOR+1% rates available
in the floating rate market are _______________
Floating Spread smaller than Fixed Spread may
just reflect that _________________ of the BBB
company ______________ than those of AAA
BBB Corps fixed rate depends on the
___________________ it borrows at in the future

Page 61
Another Example of an Interest
Rate Swap
Consider this example of a plain vanilla
interest rate swap.
Bank A is a AAA-rated international bank
located in _______. and wishes to raise
$10,000,000 to finance floating-rate
Eurodollar loans. Two alternatives:
5-year fixed-rate Eurodollar bonds at 10
percent.
It would make more sense for the bank to
issue floating-rate notes at LIBOR to
finance floating-rate Eurodollar loans.

Page 62
Example of an Interest Rate
Swap
Firm B is a BBB-rated __________. It needs
$10,000,000 to finance an investment with a
five-year economic life. Two alternatives:
Issuing 5-year fixed-rate Eurodollar bonds at
11.75 percent.
Alternatively, firm B can raise the money by
issuing 5-year floating-rate notes at LIBOR +
percent.
Firm B would prefer to borrow at a fixed rate.

Page 63
Example of an Interest Rate
Swap
The borrowing opportunities of the two firms are:

Page 64
Example of an Interest Rate
Swap
Swap
Bank
10 3/8% 10 %

LIBOR 1/8% LIBOR %

Bank Company
LIBOR 1/8 [LIBOR ]= 1/8
A 10 - 10 3/8 = 1/8 B

COMPANY B BANK A
Fixed rate 11.75% 10%
Floating rate LIBOR + .5% LIBOR

Page 65
Example of an Interest Rate
Swap
Swap
Bank
10 3/8%

LIBOR 1/8%
Bank
A

COMPANY B BANK A
10%
Fixed rate 11.75% 10%
Floating rate LIBOR + .5% LIBOR

Page 66
Example of an Interest Rate
Swap
Heres whats in it for B:
Swap
Bank
10 %
LIBOR %

Company LIBOR+ %

COMPANY B BANK A
Fixed rate 11.75% 10%
Floating rate LIBOR + .5% LIBOR

Page 67
The Quality Spread
Differential
The Quality Spread Differential represents the
potential gains from the swap that can be shared
between the counterparties and the swap bank.
QSD = Fixed Differential Floating Differential =

There is no reason to presume that the gains will

be shared ____________.
In the above example, company B is less credit-
worthy than bank A, so they probably would
have gotten less of the QSD, in order to
compensate the swap bank for the default risk.
Page 68
Example
Determine the upcoming payment in a plain vanilla interest rate
swap in which the notional principal is 70 million Euro. The end
user makes semi-annual fixed 7% payments, and the dealer
makes semi-annual floating payments at Euribor, which was
6.25% on the last settlement period. The floating payments are
made on the basis of 180 days in the settlement period and 360
days in a year. The fixed payments are made on the basis 180
days in the settlement period and 365 days in a year. Payments
are netted, determine which party pays and what amount.

Page 69
Example
A US company enters into an interest rate swap with a dealer.
In this swap, the notional principal is $50 million and the
company will pay a floating rate of LIBOR and receive a fixed
rate of 5.75%. Interest is paid semiannually and the current
LIBOR is 5.15%. The floating rate are made on the basis of
180/360 and the fixed rate payments are made on the basis of
180/365. Calculate the first payment and indicate which party
pays.

Page 70
Interest rate swap
valuation
You can represent a swap as a bond portfolio or a
series of FRAs. We use bond portfolio representation.
From the point of view of floating-rate payer, this is
a long position in the fixed rate bond and short
position in the floating rate bond.
______________________
From the point of view of fixed-rate payer, this is a
long position in the floating rate bond and short
position in the fixed rate bond.
______________________
Immediately after the interest payment, the floating
rate bond is worth exactly the notional amount

Page 71
Example
Consider a financial institution that pays LIBOR 0.25% and
receives 10.50% p.a. (annual compounding) from a swap end
user on a notional principal of $10 million. The swap has
remaining life of 4 years. The fixed rates have fallen from
10.5% to 9% and the swap end user wants to get out of the
deal. How much should the financial institution charge for the
right to cancel the agreement?

Page 72
An Example of a Currency
Swap
An agreement to pay 11% on
a sterling principal of
10,000,000 & receive 8% on a
US$ principal of $15,000,000
every year for 5 years
Exchange of Principal

In an interest rate swap

the principal is
_____________
In a currency swap the
principal is __________ at
the __________ and the
______ of the swap.
The Cash Flows IBM pays fixed
11% in sterling and receives 8%
in USD Dollars Pounds
$
Year ------millions------
2001 15.00 +10.00
2002 +1.20 1.10
2003 +1.20 1.10
2004 +1.20 1.10
2005 +1.20 1.10
2006 +16.20 -11.10
Typical Uses of a
Currency Swap

Conversion from a liability in one

currency to a liability in another
currency
Conversion from an investment in
one currency to an investment in
another currency
Comparative Advantage
Arguments for Currency
Swaps
General Motors wants to ____________
Qantas wants to ______________
Dealer charges 10 basis points.

USD AUD
General Motors 5.0% 12.6%
Qantas 7.0% 13.0%
The Swap when a Dealer is
Involved

USD 5%
GM Qantas
AUD 13%
Swap Market Quotations
Swap banks will tailor the terms of
interest rate and currency swaps to
customers needs
They also make a market in plain
vanilla swaps and provide quotes for
these. Since the swap banks are
dealers for these swaps, there is a
___________________.

Page 79
Variations of Basic Currency and
Interest Rate Swaps

Currency Swaps
fixed for _______
fixed for _______
floating for __________
Interest Rate Swaps
__________for floating
_________ for floating

Page 80
 Risks of Interest Rate and
Currency Swaps
Interest Rate Risk
Interest rates might move against the
____________ after it has only gotten
half of a swap on the books, or if it has
an unhedged position.
Basis Risk
If the floating rates of the two
counterparties are not pegged to the
same ___________ (i.e. LIBOR)
Exchange rate Risk

Page 81
Swap Market Efficiency
Swaps offer ______________________ and that has
accounted for their existence and growth.
Swaps assist in tailoring financing to the type
desired by a particular borrower.
Since not all types of debt instruments are
available to all types of borrowers, both
counterparties can benefit (as well as the
swap dealer) through financing that is more
_____________ for their asset maturity
structures.

Page 82
Example
A US company can issue a US$-denominated bond but needs
to borrow in GBP. Consider a currency swap in which the US
company pays a fixed rate in the foreign currency, GBP, and
the counterparty pays a fixed rate in US$. The notional
principals are $50 million and GBP 30 million, and the fixed
rates are 5.6% in US$ and 6.25% in GBP. Both sets of
payments are made on the basis of 30 days per month, 365
days per year, and the payments are made semi-annually.
What are the following cash flows: (i) initial, (ii) semi-annual,
(iii) final

Page 83
Valuation of currency swaps
Currency swaps can be represented as bond
portfolios or a series of forwards. We use bond
representation.
From the point of view of foreign currency payer
(domestic currency receiver), this is a long position
in the domestic bond and short position in the
foreign bond.
________________________________________________
From the point of view of domestic currency payer
(foreign currency receiver), this is a long position in
the foreign bond and short position in the domestic
bond.
________________________________________________

Page 84
Example
In Japan term structure of interest rates is flat at 4% and in
the US it is 9%. A financial institution has entered into a
currency swap in which it receives 5% p.a. in JPY and pays
8% p.a. in USD once a year. The principals are $10 million
and JPY 1,200 million. The swap will last for another 3 years,
and the current JPY/USD exchange rate is JPY 110. What is
the value of this swap for the financial institution?

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Swaptions
An option to enter into swap
Types:
Payer swaption
Gives the right to enter into a swap as a _________
rate payer and __________ rate receiver
Equivalent to ___________ option
Receiver swaption
Gives the right to enter into a swap as a
__________ rate payer and ___________ rate
receiver
Equivalent to ___________ option

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