How do we determine which curve to use for pricing different swaps, for e.g. I don't understand how following come:

  1. Interest Rate Swap (USD) Fixed: USD Treasury Floating: none

  2. CCS (USDINR) Fixed: USD LIBOR Floating: USD CBAS IR

  • 2
    $\begingroup$ which curve to use for what? For discounting the cash flows? For projecting floating coupons? Something else? Please clarify. $\endgroup$ Jul 29 '21 at 3:10
  • $\begingroup$ @DimitriVulis for pricing..edited $\endgroup$
    – assf
    Jul 29 '21 at 3:18
  • 2
    $\begingroup$ For USD fixed v float - if the float leg resets from 3 months LIBOR, then you use swap curve to project coupons. You use your cost of funding to discount all USD cash flows. I doubt that US treasury is your cost of funding. Perhaps fed funds + some spread? For the cross-currency swap, you still discount USD flows with your cost of funding. You discount the foreign currency cash flows with foreign swap curve (I believe MIBOR for INR) + USDINR cross-currency basis. $\endgroup$ Jul 29 '21 at 4:09
  • $\begingroup$ You wrote "which curve to use for pricing". As you probably know, modern pricing techniques use two curves, the projecting curve and discounting curve mentioned in previous comments. $\endgroup$
    – noob2
    Jul 30 '21 at 1:08

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