CALLABLE SWAP
An interest rate swap in which the fixed-rate payer has the right to terminate the swap after a certain time if rates fall. Often done in conjunction with callable debt issues where an issuer is more concerned with the cost of debt than the maturity. The embedded option is, in effect, a swaption sold by the fixed-rate receiver which enables the fixed-rate payer to receive the same high fixed rate for the remaining years of the swap in the event that interest rates fall. The fixed rate received under the swaption offsets the fixed rate paid under the original swap effectively cancelling the swap. In some definitions of a callable swap, the fixed-rate receiver has the right to terminate the swap. Also known as a cancellable swap.