Understanding Mechanics and Specifics of Cross-Currency Basis Swap

Question

I am looking at a Bloomberg Ticker for the JPY-USD Basis Swap (JYBS5 BGN Curncy). This is a 5yr term, settling on Dec 05 2019 and maturing on Dec 05 2024. The last price is -41. Several questions I have:

1) Does this mean I can only trade this swap before the start/settlement date? If not, how do I enter into a swap that has "already started"?

2) What is the lingo/convention used (how does one go "long" or "short" this swap)?

3) If I understand correctly, a cross currency basis swap exchanges notional currencies. Where can I find the spot and final exchange rate of the contract?

4) How is PnL calculated? Is there a dv01 that looks at the change of the last price from when the trade was entered? Does exchange rate also come into play?

5) Can the trade be cash settled, or does entering the trade actually require physical exchanges of currency? How would this work if one wants to exit the trade before the 5 years are up? Can one enter and exit a cross-currency basis swap trade before it is scheduled to actually start?

6) What does OIS discounting mean? Are both legs discounted at different rates for the USD and the JPY?

I can't seem to find a straightforward, clear answer on Google to some of this questions. Any help/references would be super appreciated. Thank you!

Answer 1

I’ll do my best.

1) the start date for a standard currency basis swap is I believe 2 business days after the trade date. This allows time for the banks to set up the payment instructions for the initial exchange of notionals.

2) long the basis means you make money if the -41 becomes -40 in the market. This basis essentially measures the demand for borrowing dollars (more negative, more dollars demanded).

3) yes, there are exchanges of notional. The fx rate for these is set at the spot fx rate at time of execution.

4)the pnl is measured by observing the change in the basis since execution , times the dv01 of the yen leg (because the -41 is applied to the yen leg), times the notional of the yen leg. (One complexity here is that some basis swaps have a resetting yen notional, to keep it worth the same as the dollar leg, so the yen notional will move over time).

5) they usually require actual exchange of principal. Indeed, that’s partly the reason people do them. If you want to exit in the middle , the easiest way is to provide an early exchange of principal. There will then be an unwind charge or benefit according to how the basis has moved since inception. Yes, you can execute a forward basis swap with a start date a long time in the future, but those are not quoted on Bloomberg.

6) typically these trades are subject to variation margin in dollars , so each leg is discounted at USD Fed funds , known as OIS.

Hope that clears some questions up

Answer 2

In addition to @dm63's answer maybe two references that are useful:

I am not a FI/rates expert, but this book really helped me understand the basics of how things work in practice (not just in theory).

And a nice introductory paper specifically on cross currency swaps.