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What discount curve should be used for a swap with a fixed leg and variable leg, where the variable leg is based on rate other than Libor (in my case 1-year deposit rate). Hull (5th edition, page 595) say we always use Libor for discounting (his example however is a basis swap). That seems inconsistent to me, 1) the value of the swap won't be zero at inception 2) value of swap will change due to Libor/Swap rates. My case is somewhat more complicated by the fact that cash-flows are in RMB currency, while that's not the core of my question, any additional thoughts on that would be welcome.

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Discounting in "post-crunch finance" depends on collateral agreements, e.g. CSA. For fully collateralized transactions you discount off the curve corresponding to the rate you receive on collateral. For non-collateralized or partially collateralized transactions it's more tricky and it's not something I can explain in a short answer, have a look on the internet, try for example "discounting csa". Forget about Hull, that's "pre-crunch finance".

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