End users such as corporations and banks typically use swaptions to manage interest rate risk arising from their core business or from their financing arrangements.
A hedge fund believing that interest rates will not rise by more than a certain amount might sell a payer swaption aiming to make money by collecting the premium.
A significant investment in technology and human capital is required to properly monitor and risk-manage the resulting exposure.
Addressing this, quantitative analysts value swaptions by constructing complex lattice-based term structure and short-rate models that describe the movement of interest rates over time.
For American- and Bermudan- styled options, where exercise is permitted prior to maturity, only the lattice based approach is applicable.