What sorts of products are traded on a dealer's swaptions desk? I know that they trade caps/floors, European swaptions, and Treasury bond options, but what else usually falls under their purview? For example, since the GSEs issue lots of callable bonds (which have embedded options), does the desk trade those? What are some of the more "exotic" derivatives traded on the desk?
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There are a mixture of rates and credit swaptions, a few more are credit index and inflation swaptions. These can get pretty exotic as I have seen a conditional knock in swaption on a long term constant maturity rate.
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Exotics include Berms, CMS, etc.
Hey guys, thanks for all the responses.
@gammaovertheta: yeah sorry for the confusion, by "swaptions" I meant "interest rate options" (I got the impression that they were used interchangeably, but I guess that's not quite true since there are swaptions in commodities as well). So would callable GSE debt be covered by the rates vol guys then?
All agency debt (covered bonds, callables, all) is traded by rates traders at my BB. Just like callable corporates are traded by cash traders, not credit derivative/options traders.
Swaptions are options with swaps underlying - if they are exercised the two counterparties enter into a swap agreement. Not all interest rate options are swaptions - there are also caps, floors, and many other variants. Make sure not to oversimplify that if you ever speak with rates vol traders (though each trader will probably trade many of those products). I'd play it safe and refer to the desk and traders as "rates vol", and he will say if he specializes in swaptions, or trading the vega or gamma ends of the yield curve (important difference from equity options traders), or whatever.
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