Forward Swaption

A forward starting swaption is identical to a Swaption except that you can choose how long after the swaption’s expiry date the underlying swap should start.

That is, by default the swap does not have to start a predefined number of days after the expiry date (as the swap in a swaption has to). Instead it can be defined to start on any date after the expiry date.

Advantages of a Forward Swaption

Forward swaptions are used by:

Corporates and municipalities to hedge with a period of delay, typically up to 2 years.

Investors to arbitrage mid-curve Eurodollar futures options.

Investors who want exposure to a certain portion of the yield curve, but want that exposure to end before reaching the start of that portion of the curve.

Pricing a Forward Swaption in SDX Interest Rates

The fields you are required to enter when pricing a forward swaption and a swaption are identical (see Pricing a Swaption for more information) with the following exceptions:

In a forward swaption, if you choose to enter into a cash settled instrument (using the Cash Settle button), then the swap curve annuity method is always used—this method calculates the market price as if the instrument was physically settled, i.e., it calculates the market price of the underlying swap.

In a swaption, the Expiry and Start Date fields are linked in such a way that the start date is always set to be a predefined number of days after the expiry date. In a forward swaption, the Start Date filed is not linked to the Expiry field in this way. Accordingly in the Start Date field you can set the start date to any date that falls after the expiry date.

In a forward swaption you can specify the expiry, start date and end date simultaneously by specifying all three dates in the Expiry field. You do this using the following format:

<Time to expiry><Time from expiry to swap start><Swap term>

For example, enter 1Y2Y3Y in the Expiry field to specify that:

The option expiry date is 1 year after the trade date.

If exercised, the swap will start 2 years after the expiry date (i.e., 3 years from the trade date).

If exercised, the swap will end 3 years after it starts (i.e., 6 years from the trade date).

In the Correlation field the correlation used in the calculation of the instrument is displayed. This is the correlation between the swap rates of the forward starting period (from the swaption's expiry date until the underlying swap's start date) and the period from the swaption's expiry date until the end date of the underlying swap.

Once it is displayed you can then manually edit it before calculating the instrument.

You can also enter your own market volatility or market normal volatility and then re-calculate the Greeks and various values. See Market Vol and Market Normal Vol .