A portfolio manager buys a swaption with a strike rate of 6.5% that entitles the portfolio manager to enter into an interest-rate swap to pay a fixed rate and receive a floating rate. The term of the swaption is five years.

a. Is this swaption a payer swaption or a receiver swaption? Explain.

b. What does the strike rate of 6.5% mean?

AppendixLO1