Swaptions face valuation hit on discounting switch

Move to new reference rates could hurt some swaptions holders, while others enjoy “windfall gain”

euro-dollar-discounting-switch

Investors in euro and US dollar swaptions could see widespread gains and losses when the discounting and collateral rates for cleared swaps are changed as part of benchmark reform efforts.

Swaptions valuations are based on the price of the underlying cleared interest rate swaps, typically those cleared at LCH. The clearing house is set to change the rate used to discount the present value of euro and US dollar interest rate swap cashflows, and to determine interest payments on cash collateral

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