The handbook of fixed income options : strategies, pricing and applications

When properly utilized, options offer market participants a vehicle for controlling market risk. Stock index options offer equity managers the opportunity to control the market risk associated with holding a diversified portfolio of common stocks. Options on fixed–income instruments and options on futures on a fixed–income instrument allow borrowers and lenders to control interest rate risk. There are other contracts with option-like features that can be used to control interest rate risk. Interest rate agreements (caps, floors, and collars) are nothing more than a package of interest rate options. Compound (or split fee) options are options on options. In the interest rate swap market, options on interest rate swaps (called swaptions) are available.