We are trying to analyze an algorithm (internal to our company) to calculate currency option pricing using the Garman and Kohlhagen model.
Our internal algorithm calls for CBS (Currency Basis Swaps) rates to be added to interest rates in the following manner.
Add to the USD interest rate the CBS rate for the non-USD currency.
Can anyone explain the logic for taking the CBS rate in the model? There is unfortunately no documentation in our code.