Closure

A swap agreement can be terminated using any of the following methods.

1.

Cancellation : A swap may be terminated prior to maturity. The counterparties make/receive a payment reflecting current market rates and are released from their contractual obligations.

2. Novation: A new swap agreement may be created canceling one or more existing swap agreements.

3. Netting: Two counterparties m a y h a v e more than one IRS agreements with each other. In such a case instead of going for individual settlement of each IRS contract, t h e y m a y o p t for settlement through a single net value for all t h e outstanding transactions.

4. Reverse swap: A party may enter into a new swap at current market rates to offset or reverse the terms of the existing swap agreement.

5. Selling: A party may exit a swap agreement by selling it off to another party.

Termination of a swap. There are four ways to terminate a swap before expiration: 1. Pay the market value in cash. A swap has a market value at any point in time during its life. If agreed by both parties, the swap can be terminated by having one party pay the market value of the swap to the other party. If a party holds a swap with a positive (negative) market value, it should receive (pay) a cash payment of the market value from (to) the counterparty. For example, if Microsoft holds a swap with a market value of $1 million, and its counterparty is Citibank, Microsoft can terminate this swap by receiving a cash payment of $1 million from Citibank. 2. Sell the swap to another party. With the permission of its counterparty, a party can find another party to take over its payment obligations in a swap. Example (Continued):

Microsoft can terminate this swap by selling it to Intel for $1 million, and Intel will take over Microsoft's payment obligations. 3. Enter into an offsetting swap. For example, GE holds a 3-year swap in which it makes fixed payments of 6% and receives floating payments based on LIBOR. The payments are made semiannually on June 30 and December 31. GE can terminate this swap by entering into a new 3-year swap in which it makes floating payments based on LIBOR and receives fixed payments of, say, 7% on June 30 and December 31. The floating payments in the two swaps fully offset each other, and the fixed payments net out to be a definite amount, thereby eliminating the risk associated with the floating rate. 4. Use a swaption. A swaption is simply an option to enter into a swap. A party can exercise a swaption to enter into an offsetting swap.