A swaption is an option on a swap. It gives the holder the right to enter into the swap, without any obligation to do so. As the underlying asset is a swap, which is it self a derivative, a swaption is a derivative of a derivative.
The holder of a swaption may have the right to exchange a fixed interest rate for a floating rate (this is called a payer swaption) or to exchange a floating rate for a fixed rate (this is called a receiver swaption).
One thing that makes a swap very different from a simple option is that there is no strike price. An option, like futures and forwards, is a barter of one thing of value for another, so there is no need to make a separate payment.
A swaption can therefore be defined by:
A swaption may be used, like any other option, as either a hedge or speculatively. Like other derivatives of derivatives, swaptions are complex instruments that are hard to value.