Swaption definition

An option giving the buyer the right to enter into a swap agreement by a specified date.

Common slang for swap options. A swaption is an over-the-counter option on an interest rate swap, which allows one party to swap an interest-paying investment at a certain price and time in the future with another party. Just as in the case of ordinary options, this contract gives the holder the right, but not the obligation, to enter into an interest rate or currency swap on prearranged terms.