How do I calculate the termination value of an interest rate swap before maturity?

Question

AcadiFi · Accepted Answer

The termination value equals the present value of remaining fixed-leg cash flows minus the present value of remaining floating-leg cash flows, with sign depending on which side you hold. For a receive-fixed swap, you are long a fixed bond and short a floating bond. The mark-to-market value is PV(fixed remaining) - PV(floating remaining), where the floating leg resets to par on the next reset date, so its current value equals (1 + next coupon) discounted back.

Example: Lantara Capital entered a 5-year receive-fixed swap at 3.80% on $50M notional. Two years in, the 3-year par swap rate is 2.90%. The swap now has positive value to Lantara because they receive an above-market fixed rate. Termination value ≈ (3.80% - 2.90%) × $50M × annuity factor(3yr) ≈ $0.009 × 50M × 2.82 ≈ $1.27M owed to Lantara by the counterparty at unwind.

Key points: use current zero rates to rediscount, include accrued interest on both legs since last reset, and remember the dealer charges a bid-ask spread on unwinds (typically 1-2bp in notional terms). If collateralized under CSA, the PV is already exchanged as variation margin, so the termination payment is often small.

How do I calculate the termination value of an interest rate swap before maturity?

Master Level II with our CFA Course

Related Questions

Practice Questions