A swaption with predefined limitations on exercise.The buyer of a swaption has the right to enter into an interest rate swap agreement by some specified date in the future. The swaption agreement will specify whether the buyer of the swaption will be a fixed-rate receiver or a fixed-rate payer. The writer of the swaption becomes the counterparty to the swap if the buyer exercises.An option taken on an interest-rate swap. A swaption buyer has the right to enter into an interest-rate swap agreement by a specified date.
Like a Bermuda option, a Bermuda swaption can only be exercised at certain times during its life