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Cancelable Swap

A type of swap where one party or both parties to the swap has (or have) the right but not the obligation to terminate the swap on a specific date (or a number of specific dates) before maturity. This swap comes in two different types: callable swap and puttable swap. Advantages of the cancelable swap include the following: it subjects its holder to no penalties on cancellation and requires no upfront premium payment. The fixed rate in this swap is determined by the number of rights to cancel the swap, the time to exercise the first right to cancel and the interest rate volatility (positive correlation with these three factors).

This swap is also referred to as a terminable swap.

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