Indemnification Method

A swap, in financial markets, involves exchanging the revenue generated by assets. In a typical swap, a company with a fixed-rate bond will swap the interest it earns with a company holding an adjustable-rate security. The investments themselves stay with their original owners. The firms just swap the money generated from the investments.

If one of the parties ends the swap agreement early, it can hurt the other company involved in the deal. You signed a swap agreement to exchange your fixed-rate income for adjustable-rate income from someone else. Interest rates have been rising, so you've been getting a great deal. Then the other guy cancels the agreement. You're losing that nice revenue stream earlier than expected.

The indemnification method represents a way to figure out how much that deadbeat owes you for dumping the deal early. Basically, it forces the party ending the deal to compensate you for lost revenue and any damages you incurred.

The indemnification method is a relatively simple way to handle the situation. There are other, more precise ways to calculate these losses as well, such as the agreement value method and the formula method.