Interest rate swaps are excellent ways to gain access to markets from which you are otherwise cut off. They are also an excellent way to match up your asset income with your liability obligations. However, times will come when an interest rate swap is no longer profitable or necessary. When that happens, you'll need to close out the interest rate swap. There are a number of ways to do this.
Sign interest rate swaps with relatively close termination dates in anticipation of changes.
Wait for the end of the contract.
Calculate how much the interest rate is costing you in lost income and expenses to assess whether you can afford to do this. If it is not possible, try another method.
Negotiate a buyout option into the contract before you sign it. If it does, simply pay the other party this amount and move on with your life. If it does not, move onto Step 2.
Secure something that the other party needs, like access to a market, a high-value asset or cash.
Offer the product or service from Step 2 to the other party in exchange for the ability to buy him out. This will likely be necessary, as you are the one who wants out of the interest rate swap--the other party has the upper hand in the negotiation.
Offsetting and Selling, and Swaptions
Offset the original swap by entering another swap that negates it. While you will officially be in two interest rate swap agreements, their effects will cancel each other out.
Sell the swap to someone else. This requires the permission of the other party.
Use a swaption if you have one. This is when you pay regular fees for the right to enter another swap, which you can use to offset the first swap. If you set up the swaption before you enter the swap you are now trying to exit, you can reduce your risk by having a guaranteed exit strategy--at a price, of course.
Make sure you have covered everything you need to before you enter the interest rate swap. You don't want to be put over a financial barrel by the other party.
- Make sure you have covered everything you need to before you enter the interest rate swap. You don't want to be put over a financial barrel by the other party.
Sam Grover began writing in 2005, also having worked as a behavior therapist and teacher. His work has appeared in New Zealand publications "Critic" and "Logic," where he covered political and educational issues. Grover graduated from the University of Otago with a Bachelor of Arts in history.