Breakage costs: Difference between revisions

===[[Swap]]s===

[[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 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}}