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Out-of-the-money 2.
Said of a swap considered from the viewpoint of the counterparty for which it has a negative value.
A coupon swap is out of the money for the fixed-rate receiver when, following an interest rate increase, the present value of the interest flows receivable on the fixed leg is lower than the present value of the interest flows payable in exchange on the floating leg, calculated on the basis of a yield curve. A coupon swap is out of the money for the fixed-rate payer when, following an interest rate drop, the present value of the interest flows receivable on the floating leg, calculated on the basis of a yield curve, is lower than the present value of the interest flows payable in exchange on the fixed leg.