A good friend of mine who is a Financial Business Analyst just posted this question in a mailing list -
Can anyone explain me with examples as to who is the floating ratepayer/fixed rate payer in a receiver/payer Swaption???? Have been breaking my head over it.. Please don't Google and paste.
Needless to say, I had to give an appropriate answer which my b-school Financial Management professor would have been proud of. The answer follows -
Sure!
During a Swaption session, the payer is the one who swaps money that he carries in his wallet with the product. The receiver is the person who swaps the product that he's selling for money. Now if the payer throwsthe money into the air and it floats, then he becomes a floating payer.The time duration for which the money floats in the air before gravity takes over is called as the floating rate. If the floating rate ishigher, then the payer is a floating rate payer. If the payer has some manners and keeps the money on a desk or gives it to the receiver, he becomes a fixed payer. 'Fixed rate payer' as such does not have any difference to 'Fixed payer', but the terminology is used widely in the investment banking industry in that famous street in New York whose name I cant recollect, but know that the street has a lot of walls...
Hope you liked the definition. Perhaps a google cut-paste might have been better?
I'm not sure if my friend's customers would have appreciated this kind of explanation during a consultation session, but hey, it doesn't cost much to churn out free information, right? :-)
