Regarding mandatory break clause on Interest rate swaps can someone explain how pricing works with an example. Is it compulsory to terminate the swap or novate on the exercise date. I have seen cases where the break dates are rolled forward prior to the exercise date.. Is this allowed
On the specific question being asked : if there is a mandatory break in a swap, either counterparty can insist on exercising it. Meaning, the swap gets torn up and its value determined using whatever methodology is in the confirmation. However, because it is governed by a bilateral agreement, the swap can be altered by mutual consent at any time. For example , the counterparties may agree to cancel or delay the mandatory break.