is for a long swap position while the one on the right is for a long swaption. A corporation will use swaptions as part of an interest-rate hedge for an anticipated future exposure. For example, assume that a corporation will be entering into a five-year bank loan in three months time. Interest on the loan is charged on a floating-rate basis, but the corporation intends to swap this to a fixed-rate liability after it has entered into the loan. As an added hedge, the corporation may choose to purchase a swaption that gives it the right to receive Libor and pay a fixed rate, say 6%, for a five-year period beginning in three months time. When the time comes for the corporation to engage in a swap contract and exchange its interest-rate liability in three months time (having entered into the loan), if the five-year swap rate is below 6%, the corporation will transact the swap in the normal way and the swaption will expire worth- less. However, if the five-year swap rate is above 6%, the corporation will instead exercise the swaption, giving it the right to enter into a five-year swap and paying a fixed rate of 6%. Essentially the corporation has taken out "insurance" that it does not have to pay a fixed rate of more than 6%. Hence swaptions can be used to guarantee a maximum swap rate lia- bility. They are similar to forward-starting swaps, but differ because they     represent an option (as opposed to an obligation) to enter into a swap on fixed terms. The swaption enables a corporation to hedge against unfa- vorable movements in interest rates but also to gain from favorable move- ments, although there is of course a cost associated with this, which is the premium paid for the swaption.       SWAPNOTE-ANEXCHANGE-TRADED INTEREST-RATE SWAP CONTRACT   In both the U.S. dollar and euro markets, the position of the government bond yield curve as the benchmark instrument for pricing, valuation, and hedging purposes is eroding. In the U.S. dollar market this has been the result of the decreasing supply of U.S. Treasury securities, due to continu- ing federal government budget surpluses, leading to illiquidity particu- larly at the long end of the curve.10In Europe, the introduction of the euro in 1999 resulted in a homogeneous euro swap curve replacing indi- vidual government bond yield curves as the benchmark. The nominal vol- umes of swap contacts far outstrip that of government bonds in both currency areas. For instance in June 2000 there was $22.9 trillion of swap contracts outstanding, which was over five times the combined size of the German, French, and Italian government bond markets.11 The falling issuance of government bonds has placed pressure on government bonds