A swap counterparty's credit risk exposure is determined by the cost of replacing the agreement in the event of a default. The cost of OBTAINING a replacement swap is determined by the difference between the All-In-Cost of the old swap and the AIC on a replacement swap. As an ILLUSTRATION, consider the case of a fixed rate payer in a swap with one year left to maturity and a 7 percent AIC. If the floating-rate payer defaults when the prevailing market rate on a one-year replacement swap is 8 percent, the nondefaulting party will be required to pay an extra 1 percent per year on the notional principal to replace the swap. The replacement VALUE of the swap is just the NET present value of the difference in interest PAYMENTS.

A swap counterparty's credit risk exposure is determined by the cost of replacing the agreement in the event of a default. The cost of obtaining a replacement swap is determined by the difference between the All-In-Cost of the old swap and the AIC on a replacement swap. As an illustration, consider the case of a fixed rate payer in a swap with one year left to maturity and a 7 percent AIC. If the floating-rate payer defaults when the prevailing market rate on a one-year replacement swap is 8 percent, the nondefaulting party will be required to pay an extra 1 percent per year on the notional principal to replace the swap. The replacement value of the swap is just the net present value of the difference in interest payments.