7

Collateral posted in currency XYZ is remunerated at $\text{OIS}_{\text{XYZ}}$, which translates, using the XYZUSD basis, into a synthetic USD rate $\text{OIS}_{\text{USD}}^{\text{XYZ}} = \text{OIS}_{\text{USD}} + \text{basis}_{\text{XYZUSD}}$. If you post collateral you want to choose the currency XYZ that has the highest equivalent synthetic USD rate, and ...


7

The problem here is that your market is not arbitrage-free: JPY OIS = 10% per day, flat USD OIS = 0% per day, flat USDJPY spot = 100 USDJPY Forward for tomorrow = 100 A quick sense check is that, if you have an interest rate differential, you cannot have the FX forward equal to the spot FX. I would take advantage of the arbitrage as follows: I ...


6

One derivation is to replace $V_u$ in Equation $(5)$ using the expression given by Equation $(3)$ and then work out to reach $(5)$; see Appendix A in this paper for more details. Here, we provide another derivation. See also this question. We recall that, from $(2)$ of Piterbarg, \begin{align*} V_t = \Delta (t) S(t) + \gamma(t), \end{align*} where $\Delta (...


6

"CSA discounting" does not give you a lot of information: it just means the collateralisation of the trade follows the rules agreed upon between both parties in the Credit Support Annex. But you don't know what those rules are so you would not necessarily be discounting your transaction's cashflows at OIS. I have heard people use "CSA discounting" ...


5

If you assume that you do not have any market risk (a strange assumption, but it would hold for example if you are fully hedged), then a (correctly) collaterlized derivative does not have any net future cash flow. Clearly: if the derivative contract has a cash flow of -X, its value will go down by X and the collateral account will have a cash flow of +X (the ...


3

The loans are placed in a vehicle company (“special purpose vehicle” or SPV). This company issues various tranches of debt and purchases the loans from the marketplace. There is no specific posting of collateral by the manager as you describe. The manager is paid a fee to manage the pool of loans and may also own some equity (the most junior security ...


3

Let me know whether this helps, but the author mentions a paper from Fujii and Takahashi; I have been looking for it on the internet and I have found what seems to be a version of it: Collateral Posting and Choice of Collateral Currency. I think they give a relatively transparent explanation $-$ in terms of funding costs $-$ of why the discount rate for ...


3

For both cleared and OTC swaps you need to post margin. If you are delivering cash then you will receive OIS in generally in either case. As OTC trades are bespoke you might have a different agreement with your particular counterparty - but that would be unusual. The main advantage of a central clearer is the recycling of margin. If I receive 5y from ...


3

OIS discounting is a subset of CSA discounting... technically they are not the same thing. CSA actually stands for Credit Support Annex, which is an Annex to your ISDA agreement with your trading counterpart that governs how your derivative trade is collaterallized (or not). Without the CSA agreement, the trade will get priced at the highest level of ...


3

First of all, it seems that you are solely concerned about the Funding Valuation Adjustment (FVA) here, and not CVA; Sovereigns have credit risk which should also be valued here given they would not be posting any collateral as mitigant when the market moves in your favour. But let's focus on FVA: It is important to think about FVA (and all other VAs also) ...


3

With some help of Wikipedia I pieced together an answer, the meat is in this IMF paper. First a definition: Re-hypothecation occurs when banks or broker-dealers re-use the collateral posted by clients such as hedge funds to back the broker's own trades and borrowing. Indeed, a daisy chain involving enormous amounts was created before the Lehman collapse ...


3

To expand on Marcino's correct appraisal of the matter: arbitrage was introduced with the 4 pieces of market data. i.e. JPY OIS = 10% per day, flat USD OIS = 0% per day, flat USDJPY spot = 100 USDJPY Forward for tomorrow = 100 are not consistent with no-arbitrage. Discounting is driven by how the trade is funded. e.g. if there is a collateral agreement ...


3

you have a missing element in your data - you need to take into account xccy basis. when you do so, then you would get the same valuation in both methods. the key is to remember that since your payoff of 100JPY is collateralised in usd, it effectively needs to be thought of as if your payoff is cash settled in usd.


2

Yes, because you're entering into an implicit currency swap. There was an article in "Risk" some time ago on this topic: http://www.risk.net/risk-magazine/technical-paper/1935412/choice-collateral-currency


2

There is no credit risk because the client pledges the underlying shares as collateral to the funded collar. This is not explained in the article. The structure is built in such a way that the value of the loan + derivative package is always less than the value of the shares. This can be done by for example lending an amount equal to the discounted put ...


2

Multiply each INR (resp. ZAR) leg flow forward value by the corresponding INRUSD (resp. ZARUSD) forward FX, then discount at USD OIS.


2

It means that cash is posted electronically. The party receiving the cash must pay interest on it, usually Fed Funds on an overnight basis in the US, specified in the CSA (credit support annex).


2

If you change the collateral rate, that would not increase PnL. If market moves against the bank, no collateral will be posted and the increased collateral rate will be irrelavante (assuming one way CSA), and if the market moves in favour of the bank, the client will post collateral that will be payed by the higher rate. If you change the fixed rate, that ...


1

How it works has been described clearly by dm63. I commend that answer. I would like to add a few words about "collateral", what does it refer to? Obviously the buyers of the debt tranches issued by the SPV would not do buy if they thought the SPV was just an empty worthless box. They agree to lend their money because the SPV owns some valuable ...


1

This is an unclear question so let me first state my assumption of what you are asking. You work for organisation C and are asking from organisation C's persepctive: C has, initially, a 10y10y cross-currency EUR/USD basis swap with counterparty B. C is coordinating a novation to 'step out' of the trade and counterparty A will replace them. B is a remaining ...


1

A cleared swap faces the clearing house. As a centralised trade depository the clearing house imposes margin requirements, as a kind of insurance for their perceived lower credit risk. Margin is nowadays remunerated at local currency OIS I believe. The collateral is posted in local currency (or USD depending upon product) and remunerated at local OIS. Margin ...


1

The pre-crisis concept of a risk-free rate was either government securities or LIBOR-based swap rates. As LIBOR is unsecured bank borrowing-lending rate, this was clearly an approximation too far. Counterparty credit adjustments for a bank, and post-crisis discounting: The value is derived by discounting at the overnight (OIS) rate, and then apply xVA ...


1

1. Discount Yes, usually, people discount using the risk free rate, and then adjust for the counterparty credit risk (CVA), funding cost (FVA), and so on. 2. Collateral The Margin period of risk: In the case of default, the counterparty will usually stop posting collateral for a given period of time before being closed-out. This period is called the ...


1

The discount rate for 2) should be a risky rate $r + \lambda$, although we must talk about how to determine $\lambda$. If you have sold an uncollateralized put option, the put option is an unsecured obligation of yours. Hence it should carry a similar discount rate to other unsecured obligations that you have issued. Thus, $\lambda$ is your credit spread. ...


1

Collateralised means that when the IRS is negatively valued (i.e. a liability) for one of the counterparties then they post collateral to the other respective counterparty (i.e. the asset holder) to protect them against default of the liability owner. Collateral comes in many forms. The 'gold standard' is cash remunerated at the OIS rate, but it could be ...


1

Surely you have to keep $150 in your account against the short sale, all of which you lose on the close out.


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