Which of the following is a disadvantage of a callable swap?

A callable swap provides the holder the right to terminate the swap agreement before its maturity date. However, this advantageous feature typically comes at a cost. The correct answer highlights that the party who enters into a callable swap must pay a premium for the call feature. This premium compensates the counterparty for the additional risk associated with the call option, as it allows one party to exit the agreement early, particularly if rates become more favorable for them.

This premium represents a disadvantage because it adds to the overall expense of the swap contract, potentially offsetting some of the benefits that the callable feature might provide. Choosing to include a call feature means that while it gives flexibility to the holder, it also imposes additional financial burdens that must be considered in the overall cost-benefit analysis of entering into a callable swap.

The other options do not accurately reflect disadvantages related to callable swaps. For instance, the lower fixed rate (if applicable) relates to the market conditions at the time of the swap, and having no termination option is not characteristic of a callable swap. Additionally, requiring payments at the start of the contract is not specific to callable swaps and can apply to various financial instruments.