Swaption

A swaption is a financial instrument that provides an option based on the future value of an interest rate swap. The option is European, exercised only on the exercise date.

A physical delivery swaption is such that an actual interest rate swap is entered into if the option is exercised. On the other hand, a cash settled swaption settles cash amount computed based on the future value if the option is exercised.

Key classes

A swaption is represented in Strata using the Swaption class. The Swaption class stores details of the product that was agreed. The trade details are stored in SwaptionTrade class.

A Swaption can be created using a builder as follows:

Swaption swaption = Swaption.builder()
  .expiryDate(AdjustableDate.of(LocalDate.of(2014, 6, 14), BusinessDayAdjustment.of(FOLLOWING, USNY)))
  .expiryTime(LocalTime.of(10, 0))
  .expiryZone(ZoneId.of("Z"))
  .longShort(LongShort.LONG)
  .swaptionSettlement(PhysicalSettlement.DEFAULT)
  .underlying(SWAP)
  .build();

where the expiry date is specified in terms of AdjustableDate with a suitable BusinessDayAdjustment, and SWAP represents the underlying swap product.

The swaption settlement type is PhysicalSettlement or CashSettlement, and further detail of cash settled swaptions is defined by CashSettlementMethod. These correspond to the ISDA 2006 definitions.

TIP: The strata-loader project provides the ability to load a Swaption from FpML and CSV.

Risk measures

The strata-measure module provides high-level risk measures for swaptions. This is based on the lognormal (Black) model, normal (Bachelier) model and SABR model. The main entry point is SwaptionTradeCalculations.

The following measures are available:

• present value, and associated sensitivity
• currency exposure
• current cash
• implied volatility

These measures are also available using the calculation API.

The strata-pricer module provides pricing support for swaptions.

• BlackSwaptionTradePricer class.
• NormalSwaptionTradePricer class.
• SabrSwaptionTradePricer class.

For Black and Normal methods, the Greeks can be computed:

• present value delta
• present value gamma
• present value theta
• present value sensitivity to volatility, i.e., present value vega

For the SABR method the pricer supports

• SABR parameter sensitivity

Product model

The following table summarizes the fields on Swaption that can be used to control the product. For more detail on the meaning of each field, see the Javadoc;