Absolute value

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In maths, the absolute value of a number is its positive value, whether the number itself is positive or negative. So the absolute value of +10 is +10, but the absolute value of -10 is also +10.

What possible use is the absolute value? Well, it is quite handy when talking about payments in a derivative contract which, if positive, are payable from A to B and, if negative, are payable from B to A. In such a case we can say “the party in question will pay the absolute value of the payment”.

For example if, carelessly, one said: The Calculation Agent will calculate an adjustment payment which, if positive, Party A must pay to Party B and, if negative, Party B will pay to Party A.

One would be saying that Party B was obliged to pay a negative amount — in other words, it would be owed a payment. So Party A would wind up payint Party B in every situation. This is not what is intended. Fixable thus: The Calculation Agent will calculate an adjustment payment which, if positive, Party A must pay to Party B and, if negative, Party B will pay the absolute value of that amount to Party A.

Also can come in handy with unexpected things like negative interest rates.