Company A and Company B are in an interest rate swap.
Company A defaults.
Does Company B have to continue making payments (now the full amount no net)?
In real life, would company B just default also?
I think the swap is terminated when Co. A defaults…B doesn’t pay any longer
Swaps are usually customized instruments not traded in standardized markets with counter party risk involved and when one party defaults the contract terminates and the other party does not pay any longer.
for an interest rate swap - the person who is due the payment (based on the terms and conditions) - fixed rate payer needs to pay say 125K, floating rate payer needs to pay 130K - netted - it is floating rate payer owes fixed 5K. Fixed rate payer now - since he is OWED the money - (after netting) is in credit risk. He faces the credit risk that the floating rate payer may default, and not pay.
Okay thanks for the clarification