Does the presence of a optional/mandatory right-to-break clause affect CVA calculations, and if so, how?
Given two (otherwise identical) 10y swaps with the same counterparty, one of which has a right to break at 5y (ours), intuitively I'd say the one with the break clause should have a lower CVA - if the counterparty default spread takes a dive we can exit the trade at replacement cost. The question is how do we take that into account when calculating CVA?
For the banks I deal with, when a break event occurs (regardless of whether the break was optional or mandatory) the trade is marked to market, a payment is made to whichever party is in the money & the trade is ripped up.
Trades with a mandatory break are often "replaced" with a similar trade. That might be because a counterparty isn't allowed to have a 20Y trade on their books, for example.