Wow thanks for all the comments…I’m copying part of the deal structure here. Don’t know if I understood it correctly but from what I’m reading either party can refuse to exercise? Our objective in asking for the IRS/other products is to protect ourselves against increasing interest rates as we (lender) will be giving long term (around 8-10 years) fixed rate loans to our clients. “If the maximum tenor of country limits is, say 4 years, then we could transact a 10 year interest rate swap by having rolling mutual breaks starting in 4 years; i.e. either “seller” or “buyer” would have the right but not the obligation in 4 years and 8 years from the outset to terminate the swap for cash settlement at the current fair market price. This is right to terminate is known as a ‘Bermudan’ option as it allows exercise on more than one possible date. Note however that once the option has been exercised there is no way to reverse this. Please also note that the existence of a mutual break does not allow a reduction in the credit charge for a particular swap, as at the outset there is no guarantee that the break will be exercised; credit charges will need to be calculated using the full maturity of the swap.”
this aint a swaption… its just a series of 4 yr swaps, wherein at the time of reset the buyer and seller both will have to agree whether to continue being in the IRS arrangement…IMO
It’s pretty plain vanilla then - it’s a 10 year swap, but (perhaps due to country regulations) you need to get a 4 year limit on any swap. So at 4 year intervals you can terminate the swap, but you have to pay fair value of the remaining swap.
^agree, sounds like the structure is to get around any statutory limit on the term of the swap. It would settle at fair value of the remaining term at the break dates so you’re not SOL if the counterparty breaks, assuming they pay up.
Here’s a teaser: How would this structure affect your balance sheet compared to plain vanilla going out the full 10 years?
Present value of 4 year liabs at a time…as legally one would only be holding a 4 year swap