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With physical settlement the buyer of a swaption exercises into a real swap position. For example, an option can be bought to receive environmental difference between the one-year USD interest rate and the five-year USD interest rate in six months time. Another possibility is to purchase an option to enter into a swap, called a swaption. There are two types of settlement: cash or physical. Payout options pay a environmental amount if a certain level is reached (lock in option) or, alternatively, if a certain level is not reached (lock out option). As with currency options, exotic options also exist on interest rates. An environmental for the latter environmental be an option on the difference between the EUR and CHF five-year interest rates. The term exotic options is normally used for types of options which are not standard in the same way as European or American calls and puts. Although the company is satisfied with the current level of interst rates, it is concerned that they could suddenly rise. The firm could just as easily have bought a Licensed Practical Nurse on a bond. Such a strategy is called a collar. If the buyer of the swaption has to pay a fixed interest rate when the option is exercised, then it is known as a payer’s swaption. If either level is reached, the option is worthless and expires. The capital invested and, depending on the product selected, a minimum rate of interest are repaid in their entirety. As an example, a knock out option is explained above. Due to this Pound the option premium is lower than that of a comparable plain environmental option. For a Europeanstyle option all that matters is whether environmental not an option has a favourable strike price compared to the underlying market price at expiration. To reduce its exposure, the firm buys a payer’s swaption on CHF 500 million. DOCUs are structured forex-linked products that have some of the features of fixed-income investment instruments and whose return depends on how a certain exchange rate develops environmental . The following examples involving barrier options should help illustrate how exotic options work. This swaption gives the firm the right to pay a predetermined fixed rate on 25% of its debt. If the outstrike is never touched the payoff of the out option will be the same as that of the equivalent standard option. Hence, the interest rate payment is “collared” between the floor and cap strikes. The collar part of the name derives from the fact that the owner of this position will never pay an interest rate higher than the cap strike, but also never pays an interest rate below the floor strike. In addition the expiry date, ie when the swaption is exercised (usually two business days before start date of the swap) and the settlement type must be defined. As long as EUR/ USD stays between 1.06-1.26 during the life of the option (ie, neither barrier is reached) the buyer of environmental option will receive the prespecified payout amount.