A swaption is an option which has a swap as underlying. It gives the holder (buyer) the right but not the obligation to enter into a swap agreement during the life of the option. In swaptions, the holder (buyer) will be specified either as the fixed rate payer or as the floating rate payer. Consequently, if the option is exercised, the seller of the option (the writer) becomes the counterparty to the swap, i.e., the party to the other leg (either as the floating rate payer or as the fixed rate payer).

A forward-start swap is a fixed-for-floating interest rate swap whereby the swap coupon is set at the contract date but the swap doesn’t start on that date-i.e., it is delayed to some future date.

Swaptions are similar to forward-start swaps in certain aspects, but the buyer has the option to commence payments on the effective date or simply walk away, which is not the case with forward-start swaps.