I have been out of the market for quite some time and I see that nowadays discounting is a more complicated discipline.

For collateralized trades I do understand the standard method is to use discounting based on curve associated with the collateral index rate. So if we have EUR cash-flow and collateral in EUR, we would use some EUR OIS curve for the discounting.

However, I'm not sure what's the current market practice for:

  1. discounting USD cash flow in a pool collateralized in EUR. What curve should be used for this discounting?
  2. discounting uncollateralized cash flow. Now that xBOR rates are being phased out, what rate to use for uncollateralized cash flow?

1 Answer 1

  1. If collateral is provided in EUR cash, with interest paid at Ester ( the successor to Eonia which has been abolished), then you need to perform a currency swap to change the collateral into USD. This would result in a USD rate of typically Fed Funds+ 10bp , which becomes the appropriate discount rate to calculate the PV.
  2. Practices vary, but typically one would use a risk free rate (Fed funds or Eonia ) plus a credit spread appropriate for that counterparty. Some may also add a ‘funding reserve’ reflecting the expected cost of funding the position at the bank’s cost of funds.
  • 1
    $\begingroup$ Thanks. Does that for 1) mean I'd need to bootstrap the USD-discounting-curve-under-EUR-collateral from some 'FedFunds (or SOFR) - ESTR' swap? $\endgroup$ Jun 26, 2022 at 12:28
  • $\begingroup$ Yes that would be correct $\endgroup$
    – dm63
    Jun 27, 2022 at 17:21

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.