What is ‘Callable Swap’
An exchange of cash flows in which one counterparty makes payments based on a fixed interest rate, the other counterparty makes payments based on a floating interest rate and the counterparty paying the fixed interest rate has the right to end the swap before it matures.
An investor might choose a callable swap if interest rates are expected to change in a way that would adversely affect the fixed rate payer.
Explaining ‘Callable Swap’
The additional features of a callable swap make it more expensive than a plain vanilla interest rate swap – the fixed rate payer will pay a higher interest rate and possibly might have to pay additional funds to purchase the option. The opposite of a callable swap is a putable swap, which allows the floating interest rate payer to end the swap early.
- Interest rate swaps in an agency theoretic model with uncertain interest rates – www.sciencedirect.com [PDF]
- Swaps: A zero sum game? – www.jstor.org [PDF]
- The role of interest rate swaps in corporate finance – papers.ssrn.com [PDF]
- Alternative explanations of interest rate swaps: A theoretical and empirical analysis – www.jstor.org [PDF]
- Beyond plain vanilla: a taxonomy of swaps – search.proquest.com [PDF]