Agreement Value Method

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DEFINITION of 'Agreement Value Method'

The most common of three official methods established by the International Swaps and Derivatives Association for calculating termination payments on a prematurely ended swap. The agreement value method is based on the terms available for a replacement swap because the counterparty that did not cause the early termination may need to enter into a replacement swap. Replacement swaps are used to calculate termination payments because changes in market conditions since the initial (now-terminated) swap were entered will mean that the terms of that swap are no longer available. The replacement swap will likely have different terms and different interest rates.

INVESTOPEDIA EXPLAINS 'Agreement Value Method'

The indemnification method and the formula method are alternatives to the agreement value method, but these are not used extensively. A termination event such as an illegality, tax event, tax event upon merger or credit event will cause a swap agreement to be terminated early, as will an event of default such as bankruptcy or failure to pay. If a swap is terminated early, both parties will cease to make the agreed-upon payments, and the counterparty who caused the early termination may be required to pay damages to the other counterparty.

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  2. What are the risks involved with swaps?

    The main risks associated with interest rate swaps, which are the most common type of swap, are interest rate risk and counterparty ... Read Full Answer >>
  3. What are interest rate swaps on the OTC market?

    Interest rate swaps are agreements where counter parties agree to exchange interest rate cash flows based upon the difference ... Read Full Answer >>
  4. What are the Securities and Exchange Commission regulations regarding swaps?

    The U.S. Securities and Exchange Commission (SEC) was granted the authority to regulate security-based swaps (SBS) by Title ... Read Full Answer >>
  5. What would motivate an entity to enter into a swap agreement?

    The main purpose of swap agreements is to swap cash flows between counterparties for a certain market or asset. Generally, ... Read Full Answer >>
  6. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
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