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Breakage costs: Difference between revisions
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The difference between the [[present value]] of the remaining loan repayments at their stated rate and their present value at the prevailing market rate — that is, the difference between [[present value]] of what i would get if we stuck with the original deal and you repaid the loan at term, and how much i could get if I lent that money out today, at today’s rate, for the period of the remaining term on the original loan. | The difference between the [[present value]] of the remaining loan repayments at their stated rate and their present value at the prevailing market rate — that is, the difference between [[present value]] of what i would get if we stuck with the original deal and you repaid the loan at term, and how much i could get if I lent that money out today, at today’s rate, for the period of the remaining term on the original loan. | ||
===[[Swap]]s=== | ===[[Swap]]s=== | ||
[[Swap break costs]] are the equivalent for a [[swap]]. Since | [[Swap break costs]] are the equivalent for a [[swap]]. Since a {{t|swap}} has [[cash flow]]s running in both directions, the [[present value]] of which on the [[Trade Date - ISDA Provision|trade date]] must have been equal, the theory is therefore that any swap must have a [[mark-to-market]] value of ''zero'' on day 1, [[swap break costs]] will generally be simply the uncollateralised [[mark-to-market]] value, or the [[replacement cost]], of the existing transaction. You could reach that conclusion by going through the motions: | ||
*If I terminated this swap today, what would its [[MTM]] be? This is the equivalent of "the present value of the remaining payments". | *If I terminated this [[swap]] today, what would its [[MTM]] be? This is the equivalent of "the [[present value]] of the remaining payments". | ||
*If I | *If I traded a new [[swap]] at today’s prices, what would its [[MTM]] be? According to the theory of [[homo economicus]], this ought to be necessarily ''zero'' — any other value would mean I was entering into an off-market [[swap]].<ref>Note that upfront [[PV]] of fees — especially on exotic derivatives, [[CPPI]] and that sort of thing, might mean the MTM of a swap immediately drops to factor in that, whatever else the hell happens, the dealer will have its fee for the whole period, capisce?</ref> | ||
{{sa}} | {{sa}} | ||
*[[Present value]] | *[[Present value]] | ||
{{ref}} | {{ref}} | ||