A swaption can be used to remove an existing swap. Assume that a corporation has entered into a swap
to lock in its borrowing cost. However, the corporation is concerned that the interest rates may decrease
signicantly in the next six months and would like to take advantage of the benets of lower interest rates.
en, the corporation can enter into a swaption to remove this swap in case the interest rate decreases.
If the interest rate does not decrease as expected, the swaption will be allowed to expire and the original
swap will continue. If the interest rate decreases as expected, the corporation wil ...
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