Journal of Risk

Swaptions and options

Don M. Chance


This article focuses on equity, currency, and commodity swaptions to determine their similarity to standard options on the underlying asset. In most cases these swaptions are shown to be equivalent to a specific quantity of options on the underlying asset. Thus, option pricing models for the underlying asset are appropriate for swaptions. Investors needing thinly traded equity, currency, and commodity swaptions can create them by restructuring options on the underlying. Dealers can offer these swaptions knowing that they can hedge the delta, gamma, and vega risk with standard options on the underlying. Replication can be done statically, thereby greatly simplifying the process.

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