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Option Transactions under ISDA 2000 Definitions

Under the 2000 ISDA Definitions, there are three kinds of option transactions:

  • a swaption
  • a swap transaction to which Optional Early Termination is applicable; and
  • a transaction specified as an option transaction

In a swaption, the seller of the swaption grants to the counterparty (the “buyer”) the right (but not the obligation) to exercise the option either:

  • if cash settlement is applicable, to demand the seller to pay to the buyer the “Cash Settlement Amount” (as agreed by the parties or determined in accordance with the agreed “cash settlement method”) or
  • if Physical Settlement is applicable, to cause the underlying swap transaction to become effective.

In a swap transaction where Option Early Termination is applicable, the seller grants to the buyer a right to terminate the swap transaction.

In consideration of the option the buyer pays the seller a “premium”, payable on a date specified by the parties (“Premium Payment Date”)

Option Style

There are three types of options, namely:

  • American, which can be exercisable anytime during the “exercise period” agreed by the parties
  • Bermuda, which is exercisable on specified dates and the “expiration date”
  • European, which is exercisable only on the expiration date

Multiple and Partial Exercise

It is possible to partially exercise under a European option but conditions such as “Minimum Notional Amount” and “Integral Multiple” may be specified to be applicable. If the option is American or Bermuda, the buyer may exercise all or less than the unexercised notional amount on one or more days, subject to the any conditions specified such as Minimum Notional Amount, “Maximum Notional Amount” and Integral Multiple.

Automatic Exercise

The parties may also agree on “automatic” exercise and if so, any unexercised portion of the option on the expiration date will be exercised if the buyer is “in-the-money” unless the buyer notifies the seller that it does not wish automatic exercise to take place. The parties may also specify automatic exercise will not take place unless the difference between the “settlement rate” and the fixed rate is greater than a threshold.

Exercise Procedures (12.2)

The buyer must give notice during the “exercise period” (i.e. between the earliest exercise time and latest exercise time on (a) the expiration date for a European option (b) each exercise date for a Bermuda option and (c) each exercise business day for a American option) and the notice will be deemed to be irrevocable.

If the notice is given after the latest exercise time, the exercise will not be valid in respect of a European option or a Bermuda option. In respect of an American option, it will be deemed to be given on the following day.

If a notice is given before earliest exercise time, the notice will be deemed to be given on the earliest exercise time.

The notice may be given orally by telephone and confirmed by a written communication within one exercise business day unless otherwise agreed.

A strict reading of 12.2 would seem to mean that the notice cannot be given before the Exercise Period but the reason for such restriction is not clear. There may be cases where the it is more practical to send out the notice before the Exercise Period for operational or other reasons.


Last updated January 2007


The above notes are intended to provide only general outlines and should be read in conjunction with, and are qualified in their entirety by, the full provisions of the relevant ISDA provisions and definitions. They should never be used in place of professional advice. We accept no responsibility for any loss arising from any action taken or not taken by anyone using this material or using this material in conjunction with any ISDA documentation in reliance thereof.

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