I doubt with regards to this. If for instance, we have the same two 5-year swaps one of them with a Mandatory Break clause in year one, what would be the differences in the CCR profile during the first year?

Would it be the same profile for both of them, since the break clause still hasn't been executed?

If this is the case, is this exposure the same as one of a 1-year swap with the difference that the CCR at the moment t=1 year would be the expected market value for the swap with the break clause?

If the CCR exposures weren't the same for the first year, would be any kind of reduction in the exposure for the swap with the break clause? From the first year onwards, the contract is liquidated and you would get the market value of the swap, being unnecessary to keep the capital levels of the potential future exposure.

Many thanks!

  • $\begingroup$ Can you describe the break clause? How would it work? $\endgroup$ Mar 11 at 10:57
  • $\begingroup$ Hi Daneel, it is a mandatory break clause, once the date arrives, the swap is liquidated, and the market value at that moment is paid to one of the parts (depending on if it is negative or positive). $\endgroup$
    – vsg
    Mar 11 at 11:05
  • 1
    $\begingroup$ Hi @vsg, the counterparty credit risk profile should look the same in the first year for both swaps, there is no reason why they should be different. They are identical swaps, their MtM moves will be identical. As you point out, the swap with the mandatory break clause will get terminated on the break-clause date, with the MtM settled, so obviously, the CCR profile will not be the same after the first year (as you rightly point out). $\endgroup$ Mar 11 at 11:36

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