A cancellable swap is a financial contract in which two parties agree to exchange cash flows based on a specified interest rate or other financial variable. The contract includes a provision that allows one or both parties to terminate or cancel the swap before its maturity date. The cancellation may be subject to certain conditions or penalties as agreed upon in the contract.
A cancellable swap is a financial arrangement that combines elements of an interest rate swap with a receiver’s swap, allowing the borrower to cancel the swap at no cost on a predetermined future date.
Key features of a cancellable swap include:
- Combination of an interest rate swap and a receiver’s swap.
- The borrower has the right to cancel the swap without penalty at an agreed-upon future date.
- The cost of the receiver’s swaption is embedded into the fixed rate of the swap, with the swaption’s strike rate matching the fixed rate.
Objectives of a cancellable swap:
- It enables the borrower to hedge against borrowing costs for a specified period while retaining the flexibility to cancel the contract without penalty.
- Particularly useful if the borrower anticipates terminating the underlying loan before the swap’s maturity.
How it works:
- The borrower is obligated to pay a fixed interest rate and receive a floating rate (e.g., three-month LIBOR) under the swap.
- The receiver’s swap grants the borrower the option to enter into a receiver’s swap (receive a fixed rate and pay a floating rate) to offset the effects of the payer’s swap at no additional cost to the borrower.
A cancellable swap is a financial derivative contract that allows the parties involved to terminate or cancel the swap agreement before its maturity date.
In a cancellable swap, the parties agree to certain conditions under which the swap can be terminated. These conditions may include specific events, such as a change in market conditions or the occurrence of a predefined trigger event.
A cancellable swap provides flexibility to the parties involved, allowing them to exit the swap agreement if certain conditions are met. This can be advantageous in situations where market conditions change or if the parties’ financial circumstances evolve.
Yes, there are risks associated with cancellable swaps. The party terminating the swap may be required to pay a termination fee or compensate the other party for any losses incurred due to the early termination.
No, a cancellable swap cannot be cancelled unilaterally. The termination conditions and procedures are typically agreed upon by both parties at the time of entering into the swap agreement.
No, a cancellable swap can only be cancelled if the predetermined conditions for termination are met. These conditions are usually specified in the swap agreement.
In some cases, a cancellable swap may be transferable to another party, subject to the consent of all parties involved and any applicable legal and regulatory requirements.
Yes, a cancellable swap can be modified or amended if all parties involved agree to the changes. However, any modifications or amendments should be documented in writing and comply with the terms of the original swap agreement.
The regulation of cancellable swaps may vary depending on the jurisdiction and the type of swap involved. In many cases, cancellable swaps may fall under the purview of financial regulatory authorities and may be subject to specific laws and regulations governing derivatives and financial instruments.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 28th April 2024.
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