Identifier: C3T7L5 · Revision: 2026-10-26 · Classification: restricted

Decision and objectives

Compare swap model value with executable termination cash. The decision record must connect the exposure, cash dates and implementable contract, rather than stop at a favorable price forecast.

By the end, you can compare swap model value with executable termination cash; stress cross-currency basis, collateral and counterparty exposure together; evaluate the transformed liability against a funded baseline.

Prerequisite: C3T7L4; completed Classes 1 and 2 and the Stock Market School foundation or Forex School foundation. All cases below are hypothetical; their prices, costs, rates, dates, contractual assumptions and collateral amounts are teaching inputs, not current offers.

Mechanics

A swap valuation is the discounted value of remaining receipts minus remaining payments under stated curves and conventions. Cross-currency basis is an additional market pricing component associated with exchanging funding between currencies; equal textbook rate differentials do not force an executable zero-basis quote. Collateral terms can change discounting and create immediate cash needs. Netting and collateral reduce some credit exposure but do not guarantee recovery or liquidity.

Price and return drivers

For a supplied valuation table, mid value = receipt-leg present value − payment-leg present value. Executable termination cash then reflects dealer spread, documented fees and settlement timing. Keep collateral return separate from profit: returning your pledged principal is not a second gain. Model sensitivities identify changes around the stated scenario; they are not exact probabilities or loss limits.

Worked case

Hypothetical domestic firm evaluates an existing pay-fixed swap: remaining received-leg present value TRY 1,200,000 and paid-leg value TRY 1,150,000. Mid asset TRY 50,000. Dealer closeout pays TRY 43,000; explicit termination fee TRY 2,000 leaves TRY 41,000. Previously pledged TRY 80,000 cash is returned separately, so total cash release TRY 121,000 contains only TRY 41,000 termination receipt and TRY 80,000 own collateral. Lifetime setup TRY 3,000 and collateral funding TRY 6,000 reduce the incremental termination-plus-cost result to TRY 32,000 before tax; earlier coupons must still be included for a full lifetime return.

Adverse case

A supplied joint curve/basis shock changes received PV to TRY 1,080,000 and paid PV to TRY 1,180,000: mid liability TRY 100,000. Dealer requests TRY 108,000 to close plus TRY 2,000 fee, so cash payable TRY 110,000. If collateral requirement rises from TRY 80,000 to TRY 130,000 before closure, TRY 50,000 extra is needed under the hypothetical policy. Existing collateral cannot simultaneously count as free invoice cash and as posted security. Provider distress can also delay collateral return and replacement hedging.

Practical use

Request model inputs and an executable termination quote for the same timestamp, legal entity, notional and remaining schedule. Read collateral currency, haircuts, thresholds, dispute and closeout netting terms, and confirm domestic access and tax status. Include original debt spread, periodic coupons, basis, setup fees, collateral interest, transfer costs and exit charges. No public definition supplies a universal customer protection or current swap quote.

Reconcile the confirmation, position register and cash statement separately. Costs include the quoted bid/ask spread, brokerage and clearing charges, collateral or principal financing, currency conversion, custody where relevant, and exit or termination charges. A mark is not a fill. Any amount explicitly excluded below remains outside the reported result. Tax is excluded from these teaching cases: an actual comparison requires income year, investor residence and individual/corporate status, contract and acquisition dates, settlement form and effective law. The GIB guide, checked 2026-10-26, covers 2025 individual investment income, so its publication date alone does not settle a 2026 derivative liability.

Decision boundaries

Keep the swap only if the combined debt, cash reserve and residual benchmark/credit exposure still meet the objective. A positive historical coupon does not justify ignoring an unfunded termination liability. Deferral can be appropriate when governing closeout terms or counterparty evidence are missing; a hedge label is not sufficient assurance.

Practice and references

Exercise: hypothetical received PV TRY 700,000, paid PV TRY 725,000. Calculate mid liability, executable payment and net cash after collateral return. Solution: received PV less paid PV = 700,000 − 725,000 = −TRY 25,000; dealer payment demand TRY 28,000 and fee TRY 1,000 mean TRY 29,000 payable. Returning TRY 40,000 own collateral leaves net cash release TRY 11,000, but does not turn the TRY 29,000 closeout cost into a trading gain. Earlier coupons and funding remain separate.

Takeaway: Evaluate the transformed liability against a funded baseline using the actual cash schedule, with every excluded cost and remaining exposure stated.

Reference card: interest-rate-swap. Formula: Swap supplied-leg net present value. Glossary: Cross-currency basis, Collateral threshold, Netting. Next lesson: C4T1L1. Complete the class examination before continuing. Topic test.

Sources and verification date (2026-10-26):

Shared reference guide | Class examination