10 votes
Accepted

Cheapest-to-deliver (CTD) discount curve

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}_{\...
Antoine Conze's user avatar
8 votes
Accepted

Risk-neutral expectation equation with collateral and funding costs

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 ...
Gordon's user avatar
  • 21.1k
7 votes

Why is CSA currency OIS rate used in discounting instead of local currency OIS?

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 ...
Marcino's user avatar
  • 507
7 votes

CSA discounting vs OIS discounting

"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 ...
Marcino's user avatar
  • 507
5 votes
Accepted

Uncollateralised trades in Libor transition

Two replacements for the 3M Libor curve are possible: Construct a new 3M Swap discounting curve by adding spreads on top of the SOFR curve. These spreads can be calibrated on uncollateralized 3M SOFR ...
Ami44's user avatar
  • 828
5 votes

Operational aspects of repo funding trades

I believe the example is merely for illustrative purposes. You shouldn't be able to fully fund a position in real life. The funding of (repo) and the bond purchase need not be with the same ...
AlRacoon's user avatar
  • 6,532
5 votes

Collateral replication argument

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 ...
Daneel Olivaw's user avatar
4 votes
Accepted

Collateralized Interest Rate Swap

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 ...
Attack68's user avatar
  • 10.2k
4 votes

What is the definition of "cheapest collateral"?

Just want to make sure we have got it right here. The cheapest collateral to deliver (if you have a choice of securities) is that with the highest cost of funds, which means the highest repo rate. By ...
dm63's user avatar
  • 17.1k
4 votes
Accepted

How does the Collateral in Collateralized Loan Obligations (CLOs) Work?

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 ...
dm63's user avatar
  • 17.1k
4 votes
Accepted

Collateral on Derivative Position

It is true that some collateral agreements, there is a clause that says that the interest rate on cash collateral is floored at zero. It also specifies the interest rate index, which is usually Fed ...
dm63's user avatar
  • 17.1k
4 votes

Uncollateralised trades in Libor transition

To add to above answer, this GARP article is summarizing recent work on new benchmark indices that attempt to address what Libor was meant to ('fairly') cover, but RFR’s don't, namely (term, ...
ir7's user avatar
  • 5,043
3 votes

How does the Collateral in Collateralized Loan Obligations (CLOs) Work?

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 ...
nbbo2's user avatar
  • 11.3k
3 votes
Accepted

Why do we theoretically have to take cross currency basis volatility into account when constructing Cheapest To Deliver (CTD) discount curves?

Because the formula contains the expression max{currency bases}. Whenever there is a max, there’s an option. Eg a regular call option payout max{0, S-K}. The formula expresses only the intrinsic ...
dm63's user avatar
  • 17.1k
3 votes

CSA discounting vs OIS discounting

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 ...
Larasing's user avatar
  • 193
3 votes
Accepted

One Way CSA Agreements

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 ...
Marcino's user avatar
  • 507
3 votes

Why is CSA currency OIS rate used in discounting instead of local currency OIS?

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 ...
Mr Batweed's user avatar
3 votes
Accepted

What is the difference between a cleared interest rate swap and a OTC interest rate swap with collateral in theory

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 ...
JoshK's user avatar
  • 2,613
3 votes
Accepted

posting US treasury as collateral

No, it would not. There is no need for an explicit interest payment when securities are posted. This is because an interest rate is effectively already being applied (the overnight repo rate on the ...
dm63's user avatar
  • 17.1k
2 votes

Funded equity collars and margin loans

Further, a key element is overlooked in these answers. Although the share pledge under the collar transaction does eliminate most of the credit risk borne by the investment bank - it is still a loan. ...
Anonymous's user avatar
2 votes

Funded equity collars and margin loans

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 ...
Ivan's user avatar
  • 1,386
2 votes

Valuing a cross currency basis swap using a third currency as a collateral

Multiply each INR (resp. ZAR) leg flow forward value by the corresponding INRUSD (resp. ZARUSD) forward FX, then discount at USD OIS.
Antoine Conze's user avatar
2 votes
Accepted

Cash as Collateral in OTC Market

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).
dm63's user avatar
  • 17.1k
2 votes

Price Adjustment Interest (PAI) for collateral Bond

If bonds are given as collateral, the recipient can pledge them in the repo market, in return for cash. The recipient will then need to pay the repo rate on that cash borrowing. So the answer is ...
dm63's user avatar
  • 17.1k
2 votes
Accepted

Cheapest-to-deliver (CTD) discount curve II

The formula simply states that the XXXEUR forward FX are the same under CSA.EUR collateralization and under CSA.USD collateralization. It holds if disregarding the theoretical convexity adjustment ...
Antoine Conze's user avatar
2 votes

Optimising PnL on an interest rate swap

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 ...
David Duarte's user avatar
  • 5,815
2 votes

Synthetix' assets failure scenarios

There are some risks mentioned in the Synthetix Litepaper: One risk involves the debt SNX holders issue when they stake their SNX and mint Synths. As previously explained, this debt can fluctuate due ...
William Wu's user avatar
2 votes

future cashflow loan equivalence

When we say that holding an uncollateralized derivative is equivalent to taking a loan from the counterparty, we are referring to the economic exposure and funding implications associated with the ...
TourEiffel's user avatar
1 vote

Understanding CSA and novation

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-...
Attack68's user avatar
  • 10.2k
1 vote

What is the difference between a cleared interest rate swap and a OTC interest rate swap with collateral in theory

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 ...
Attack68's user avatar
  • 10.2k

Only top scored, non community-wiki answers of a minimum length are eligible