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.

BREAKING DOWN '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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RELATED FAQS
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    Value at risk (VaR) calculations may be helpful for risk management when trading credit default swaps and other derivatives ... Read Full Answer >>
  3. For what financial instruments is a modified duration relevant?

    The modified duration is a formula used to calculate the percent change in the price of a financial instrument when there ... Read Full Answer >>
  4. What is the difference between derivatives and swaps?

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  5. Why is tenor important on credit default swaps?

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