How is the unwind or termination value of a swap calculated?

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AcadiFi · Accepted Answer

The termination value equals the current MTM. The party with positive MTM receives cash; the party with negative MTM pays cash. The swap is then torn up and cash flows cease. Emberline Corporation holds a 10-year receive-fixed $150M IRS struck at 3.95% with 6 years remaining. Current 6Y swap rate is 4.42%. Emberline's MTM: MTM = Notional × (contract rate − current rate) × Annuity_6Y = $150M × (3.95% − 4.42%) × 5.28 (annuity) = −$3,720,600 Emberline has negative MTM because it receives a below-market fixed rate. To terminate with counterparty Dunmore Savings, Emberline must pay Dunmore approximately $3.72M. Alternatives to full termination: 1. Novation — transfer position to third party at MTM (party remains economically flat) 2. Offset trade — enter opposite swap to neutralize risk without unwinding original (keeps counterparty exposure) 3. Partial termination — unwind portion of notional ```mermaid flowchart TD A[Want to exit] --> B{Method?} B --> C[Full unwind
Pay/receive MTM] B --> D[Novation
Transfer to C3] B --> E[Offset trade
Keep original] C --> F[Clean exit] D --> F E --> G[Double CP exposure] ``` Cleared swaps unwind at CCP's end-of-day settlement price with a small bid-ask. Uncleared unwinds require bilateral negotiation; counterparties may quote wider spreads if inventory management is constrained. CVA and funding costs also influence unwind pricing — deep-in-the-money swaps held against distressed counterparties may unwind at discounts reflecting recovery uncertainty.

How is the unwind or termination value of a swap calculated?

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