Payout on a swaption: During the height of COVID crisis, the 10-yr Treasury bond was yielding...

 

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Payout on a swaption: During the height of COVID crisis, the 10-yr Treasury bond was yielding 0.70% and the 10-yr swap rate was at 0.90%. Despite all the inflation warnings, you took the view that the 10-yr swap rate cannot possibly go above 1.50% and, therefore, you sold a 12-month swaption on a 10-yr 1.50% Payer Swap on a notional of $100mln. Today, the swaption expires, and it turns out you were wrong. The 10-yr swap rate is quoted at 1.78%. Roughly what cash settlement will you have to make to the buyer of the swaption? $2.54mln $1.33mln $8.00mln $4.13mln $6.34mln Payout on a swaption: During the height of COVID crisis, the 10-yr Treasury bond was yielding 0.70% and the 10-yr swap rate was at 0.90%. Despite all the inflation warnings, you took the view that the 10-yr swap rate cannot possibly go above 1.50% and, therefore, you sold a 12-month swaption on a 10-yr 1.50% Payer Swap on a notional of $100mln. Today, the swaption expires, and it turns out you were wrong. The 10-yr swap rate is quoted at 1.78%. Roughly what cash settlement will you have to make to the buyer of the swaption? $2.54mln $1.33mln $8.00mln $4.13mln $6.34mln

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Solution Option c is Correct 800mln Payout on a swaption During the height ... View the full answer