Glossary

Swaption

An option granting its holder the right, but not the obligation, to enter into an interest rate swap with specified terms (fixed rate, tenor, notional) at a future date, used to hedge against future financing rate uncertainty on anticipated or forward-starting loans.

In CRE, swaptions are most often used to lock in hedging economics ahead of an anticipated future financing event — such as a forward rate lock on a permanent loan takeout for a project still under construction, or to hedge a loan extension option exercisable at a future date — without committing to the swap itself until the underlying financing actually closes. A "payer swaption" gives the holder the right to enter a swap paying fixed and receiving floating (protecting against rising rates before a future fixed-rate financing), while a "receiver swaption" gives the right to pay floating and receive fixed. Because a swaption is itself an option, its premium reflects not just the current shape of the rate curve but implied interest rate volatility over the option's life, making swaptions a more expensive and less commonly used hedge in CRE than the more standard cap, floor, and vanilla swap instruments.