Which of the following best describes a ‘break clause?

Which of the following best describes a ‘break clause?
A . A break clause gives either party to a transaction the right to terminate the transaction at market price at future date(s)
B . A break clause determines the process by which amounts due on early termination will be determined
C . A break clause describes rights and obligations when the derivative contract is broken
D . A break clause sets out the conditions under which the transaction will be terminated upon non-compliance with the ISDA MA

View Answer

Answer: A

Explanation:

A break close, also called a ‘mutual put’, gives either party the right to terminate a transaction at market price at a given date, or dates in the future. These are usually availed of in longer dated transactions, eg 10 years and over. For example, a 15-year swap might have a mutual put in year 5, and every 2 years thereafter. All other choices are incorrect.