The Effects on Implied Volatility by Testing Separately an Option and a Swap Contract and Then Integrating Them in a Swaption. Evidence From the Danish Option Market

A standardized swap contract involves the exchange of principals, regular coupon payments and return back of the principal in addition to the last interest payment at the expiration of the swap agreement. The most common contracts are plain vanilla interest rate, commodity or foreign exchange swaps. Options are a special type of financial asset that gives the holder the right but not the obligation to buy or sell an underlying security at a predetermined price. Options are of two types: put options and call options. A call option gives the right but not the obligation to buy, and a put option the right to sell at a specific price within a certain time period. European options give the right to exercise it only on the expiry date. In this article, we test the implied volatility of a European swaption or integration of a swap and option based on the Danish option market