Introduction
"Foreign Exchange Interest Rate Swaption" product is an option to enter into a swap. A plain vanilla Interest Rate Swaption is a swaption with underlying swap to pay the fixed rate and receive the floating rate or the other way around. Under the conditions of paying a certain option fees，the swaption buyer has the right but not the obligation to enter into a pre-designated swap on the swaption expiration date (European style option) or within a time period (American style option). If the market level is more favorable, the swaption buyer could also determine to give up the exercise of the swaption and enjoy the flexibility of entering into a new swap at better market level.
Features
Corporates as swaption buyers could hedge against unfavorable future market movements while preserve the flexibility to gain from favorable market movements. Swaptions are often used to hedge contingent risk exposures. It could be used by parties entering into a swap to give them the flexibility to terminate a swap. And it could be used to speculate on interest rate as well.
Target Customers
Customers with foreign currency assets or liabilities.
Process
1. Agreement signing: before conducting option trading with Bank of China, customers need to sign the Master Agreement of Derivative Transactions.
2. Inquiry: customer shall inquire from Bank of China about the price by providing all the transaction details in form of written application.
3. Completion of the transaction: once the transaction is concluded, Bank of China shall provide transaction confirmation to the customer.
4. Settlement: on the swaption value date, the swaption buyer will pay the seller an amount of option fees. On swaption expiration date, the swaption buyer decides whether or not to exercise the option and inform the counterparty, i. e, the corresponding seller. If the options are to exercise, then the twp parties enter into a pre-designated swap and actual settlement shall take place on every–coupon exchange date, otherwise the option will be expired.
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