Are there any risks associated with a Swaption?
Yes. The primary risk with a Swaption occurs after you have exercised your right and proceeded with the Swap. Should interest rate movements be different to your expectations, the Swap may have the opposite effect to what you were trying to achieve with the transaction. You can however reverse or terminate the Swap should this happen (remembering you may be required to pay the Bank, or the Bank will pay you, the residual value of the Swap). It is also important to note, that if interest rates do not rise above the interest rate nominated in the Swaption on the exercise date, you have not obtained any benefit from the premium paid for the purchase of the Swaption. The premium is the cost of obtaining protection against a rise in interest rates.
