Swaptions (effective September 30, 2002)
Effective September 30, 2002. First incorporated into the 3Q02 capital classification released by OFHEO 12/30/02.
Assume swap settlement (i.e., initiation of the underlying swap) when a
swap option is exercised.
Calculate a “normalized” fixed-pay coupon by subtracting the spread over
the index, if any, from the coupon on the fixed-rate swap leg.
3. For all exercise types (American, Bermudan, and European), consistent with RBC Rule section 220.127.116.11, assume exercise by the party holding the swap option if the equivalent maturity Enterprise Cost of Funds is more than
points above the normalized fixed-pay coupon, for a pay-fixed swaption (a call
or ‘payor’ swaption), or
b. 50 basis points below the normalized fixed pay coupon for a receive-fixed swaption (a put or ‘receiver’ swaption).
Amortize option premiums on a straight-line basis over the option
term. (Amortize any remaining
balances upon option exercise.)