Asset swap call option

Asset swap - Wikipedia

An asset swap in which the seller retains a call option on the underlying floating-rate or fixed-rate asset. This option gives the seller the right to repurchase the asset at a specified spread at certain future time.

The callable asset swap is an equivalent to an ordinary asset swap combined with a bond or floating rate note and a fixed-floating swap.

The option is typically European-style or Bermudan-style , i.

Derivatives | Callable Asset Swap

The option's strike is equal to the initial sale price of the asset. If the price of the asset increases, the seller may call the swap away. The buyer receives the strike spread plus the principal.

The repurchasing seller can, then, remarket the asset at current market conditions, pocketing the difference spread.

Likewise, the seller may alternatively enter into a new callable asset swap with a new buyer at more favorable terms.

However, if the asset price decreases, the swap seller will not exercise the option to call, and the asset will be kept with the buyer till maturity date. The swap buyer is said to be selling the swap seller a call option against a premium being the incremental yield over the holding period.

This swap is also known as a remarketable asset swap.

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