0
$\begingroup$

For example, Australian government issues a bond denominated in USD currency? Which curve does the interest rate risk fall in? Australian Gov Curve or USD Gov Curve?

$\endgroup$
4
  • 1
    $\begingroup$ Aus Gov USD Curve. There is a separate Aus Gov AUD curve too (which is usually more liquid that the Aus Gov USD curve). $\endgroup$
    – bhutes
    Jul 23, 2019 at 7:12
  • $\begingroup$ what is a Aus Gov USD Curve? u mean Aus Gov USD Basis curve? $\endgroup$
    – lakshmen
    Jul 23, 2019 at 12:36
  • $\begingroup$ No, I didn't mean the basis curve. Each credit entity can have a curve in different currencies, e.g. Indonesian Govt issues debt in both IDR and USD (both are fairly liquid traded instruments). Consequently, an IDR curve and a USD curve for the Indonesian Govt can be extracted from traded instruments. Each curve stands in its own right.(off course, traders may want to track and analyze the basis between the two curves, but that's another matter). Same for Aus Govt - it has traded debt instruments in both AUD and USD; hence separate curves can be backed out. $\endgroup$
    – bhutes
    Jul 23, 2019 at 14:05
  • $\begingroup$ USD curve (with obviously a credit spread to US Govt).. Half of EM is in this position, with local ccy and hard debt issued. Either curve on their debt don't have to look or behave anything like the other one! $\endgroup$
    – demully
    Aug 20, 2019 at 6:45

2 Answers 2

1
$\begingroup$

It should be the USD curve because it was issued in USD currency and hence the yields should be benchmarked off the US Treasury curve.

$\endgroup$
0
$\begingroup$

You definitely don't have any exposure to any AUD curve. Looking at the risk to the USD-denominated Australian government curve is less than perfect because this curve is the sum of a USD default risk free curve and a credit spread to compensate the bondholders for the possibility that the bonds may default. For the risk free USD curve, you can use UST, or USD swap curve equally well. It's more convenient to choose the instruments that you would use to hedge your USD IR risk if you're looking to retain the credit spread exposure and not have a view on risk-free interest rates. With these risk measures, you should be able to explain your PL in terms of the USD rates and the credit spread.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.