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When you strip your rate curves using CSA, what kind of convexity effects might appear as a result when computing the CSAed curve from one fixing to another ?

For example if you are valuing an USD trade collateralised in EUR LIBOR 3M, is there an effect caused by the correlation between the FX rates you use to convert the forward cashflows and the discount factors in the EUR fixings used for collateral ?

If there is, how can you take it in account ?

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Yes, because you're entering into an implicit currency swap.

There was an article in "Risk" some time ago on this topic: http://www.risk.net/risk-magazine/technical-paper/1935412/choice-collateral-currency

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  • $\begingroup$ Ah, I do not have a login to Risk mag ... EDIT: A simple google search was enough ... $\endgroup$
    – BlueTrin
    Commented Nov 5, 2012 at 16:04

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