DEFINITION of 'Callable Swap'

An exchange of cash flows in which one counterparty makes payments based on a fixed interest rate, the other counterparty makes payments based on a floating interest rate and the counterparty paying the fixed interest rate has the right to end the swap before it matures.





An investor might choose a callable swap if interest rates are expected to change in a way that would adversely affect the fixed rate payer.

BREAKING DOWN 'Callable Swap'

The additional features of a callable swap make it more expensive than a plain vanilla interest rate swap - the fixed rate payer will pay a higher interest rate and possibly might have to pay additional funds to purchase the option. The opposite of a callable swap is a putable swap, which allows the floating interest rate payer to end the swap early.

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RELATED FAQS
  1. What are the risks involved with swaps?

    Learn about interest rate risk and counterparty risk for interest rate swap agreements, and understand how the Dodd-Frank ... Read Answer >>
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    Learn about the counterparty to a derivative contract, and how derivative swap agreements traded over the counter have counterparty ... Read Answer >>
  3. How do currency swaps work?

    Learn about how a currency swap works, including who uses these transactions, and the mechanics and purpose of the different ... Read Answer >>
  4. What is an absolute rate?

    An absolute rate is easy to understand once you know the basics of an interest rate swap. An absolute rate is the fixed rate ... Read Answer >>
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