# Tag Info

9

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 ...

5

The ATM is an outright position (long 50 delta put and 50 delta call) so the main exposure is vega. It is the riskiest of the three, and demands a higher bid-offer spread from market makers to compensate them for the additional risk. The RR is a spread position (long 25 delta call, short 25 delta put) with zero vega, the main exposure is skew. Because the ...

5

When you look at EUR/USD Cross Currency basis historical chart, you will notice that it was very similar in magnitude before 2008 to what it is now: in other words, there has always been some cross-currency basis, it hasn't really gotten more pronounced post 2008. Many people (even seasoned industry professionals) believe that the Cross-Currency basis has to ...

4

I do it very simply. First, figure out the swap rate for each currency. Let's do those for 1y EUR/USD: 1) y US swap is 1.8104 2) y EUR swap is -.5432 mid (yes, negative) 3) look at the implied yield for the FX spot vs the 1y fwd. Spot is 1.1052 and 1y is 1.1341275. That gives you .236075 EUR more at settlement, which is 2.136% rate of 2.136 - [us ...

4

I’ll do my best. 1) the start date for a standard currency basis swap is I believe 2 business days after the trade date. This allows time for the banks to set up the payment instructions for the initial exchange of notionals. 2) long the basis means you make money if the -41 becomes -40 in the market. This basis essentially measures the demand for ...

4

As for the book, the best one I have come across is Pricing and Trading Interest Rate Derivatives by Darbyshire, although it's a bit pricey (indeed as most finance books are) (https://www.amazon.com/Pricing-Trading-Interest-Rate-Derivatives/dp/099545552X). I used to trade Xccy Basis Swaps (which is just another name for Cross-Currency Swaps): let me try to ...

4

In addition to Dimitri's comment and user35980's answer above, the following comes to mind: so much USD has been printed by the FED already and now with Democratic majority likely, more fiscal stimulus and even more FED balance sheet expansion is being priced in over the past few days. Because the market is awash with USD liquidity, everyone who sits on USD ...

4

To get an accurate answer you probably won't be able to get around using a proper pricer and comparing the two methods. To contrast the two approaches: FX Forwards: convert all cashflows from CCY1 to CCY2 using the interpolated FX forwards, then discount all payments at a single $YTM_{CCY2}$. XCCY: create a cross currency swap where the paying CCY1 leg ...

3

A recent report by the BIS provides a good explanation: Because they are hedging a net US dollar liability, Australian banks on balance supply US dollars in the cross-currency swap market. That contrasts with banking systems that are funding net US dollar assets and so, on balance, demand US dollars in the swap market. This structural difference means that ...

3

So you have a USDJPY cross currency basis swap priced using: USD OIS discounting and USD Libor pojection for the USD leg USDJPY Basis curve discounting and JPY Libor projection for the JPY leg The market price of the swap (spread on JPY Leg) if given by solving: PV USD Leg (in USD) = PV JPY Leg (in USD) Where: PV of the USD Leg is calculated by ...

3

The general way to do this is first take observed market spreads for various tenors, then calibrate a discount curve such that the foreign leg plus the spread at each tenor discounted at the calibrated curve is equal to the local currency leg discounted at OIS. Then you can calculate a spread from the curve for any given tenor using the two discount curves.

3

To add to dm63's answer, I think there are a few reasons - It's worth asking about why a cross-currency basis spread exists in the first place. The standard explanation is demand from (for example) Japanese corporates to issue fixed-rate debt in the US, where rates are generally higher, and swap the payments back into JPY with a cross-currency basis swap. ...

3

The curve Bloomberg EUR swaps curve (YCSW0045 Index) is indeed the euro equivalent of the Bloomberg USD swaps curve (YCSW0023 Index). By equivalent I mean that each curves are constructed in the same manner : using sames types of instruments (deposits, FRAs, futures, swaps) with the same bootstrapping/implying method (exact fit vs best fit). For each you ...

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There is no contradiction and basically no ambiguity. Furthermore, the kind of product (linear or non-linear) has no bearing on the question. It is really only a question of basic calculus. Let us call the three FX rates $x, y, z$ which satisfy the relation (or constraint) $z=xy$ and your product $P$, which is a function of $z$ only. You can interpret $P$ ...

3

I think it's possible. When you say the RFRs are flat, I think we can interpret that as flat for all maturities, including the 1y. So from the 1y Forward rate, we can back out the spot rate via the following relationship between the Spot, Forwards and the RFRs: $$S_{EUR/USD}(1+r_{USD})^n=(1+r_{EUR}+r_{Basis})^nF_{EUR/USD}$$ Above, $r_{Basis}$ stands for the ...

3

The xccy basis is a measure of the deviation from covered interest parity. This is a fancy way of saying how much more demand for USD over MXN (or vice versa) there is in the market. Assuming the USD/MXN basis is negative (as it usually is for EM ccys): if the basis widens then it's a sign of mkt stress (risk-off), and if it tightens then it's a risk-on ...

3

In FX swaps and FX forwards, the following formula holds: $$S_{AUD/USD}(1+r_{USD})=(1+r_{AUD}+r_{basis})F_{AUD/USD}$$ The Spot $S_{AUD/USD}$ and the Forward $F_{AUD/USD}$ are traded and their prices are observed in the market. If you take the USD OIS rate for $r_{USD}$ and also the AUD OIS rate for $r_{AUD}$, you will be able to extract the term $r_{basis}$ ...

3

The CVA on a cross currency swap comes mostly from the final exchange (being the biggest flow). If you as an end user are paying the EUR, then the bank is receiving the EUR a d paying the USD. They will see that this position is a net receivable, because EUR is more valuable on a forward basis than spot. Receivables attract a higher CVA than payables. (...

2

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

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Suppose you wanted to value a 5Y EUR IRS with a USD cash collateralised curve this is the broad process: Get the 5Y EUR 3M / OIS basis, say this is 10bps: This establishes the discounting basis in the local (EUR) currency. Now get the 5Y EUR/USD Cross-currency basis, say this is EUR 3M-IBOR - 40bps: This establishes your link to dollars. Now get the 5Y ...

2

There is a small convexity adjustment coming from the fact that the notional resets at the beginning of a 3M period but is paid at the end. This convexity adjustment is driven by the covariance between FX and funding basis (Libor minus discount rate). Market also neglects the fact that JPY Libors are collateralised in USD which means there is a convexity ...

2

You can synthesise this with the single currency IBOR-OIS basis swap (SBS) in each currency. For example paying the EUR/USD 10Y XCS @ -40bps, represents paying 3M Euribor -40 versus receiving 3M USD Libor flat. If you then buy a EUR 10Y OIS/IBOR SBS @ 8bps, this represents receiving 3M Euribor -8bps and paying EONIA flat. If you then sell a USD 10Y OIS/IBOR ...

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To give a short answer , it is very simple. Market participants cannot actually borrow and lend freely at USD Libor or Euribor. Hence the basis swap cannot easily be arbitraged away.

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One thing that comes to mind are the USDEUR FX forward rates used as input. Those should be consistent with the curves you're building, ie. $F_{X{$}}(t_0,f_i) = S_{X{$}}(t_0) \cdot P_X(t_0,a_{i,s}) / P_{$}(t_0,a_{i,s})$2 The typical interest rate parity argument goes something like this: Let$f_0$be the EUR(domestic)USD(foreign) exchange rate. 1) You convert it to USD$f_0$and invest at$r$to receive USD$(1+r\tau)f_0$at$T$. 2) You keep EUR 1 and you can invest in at$r^*$to receive EUR$(1+r^*\tau)$at$T$. The two scenarios might be assumed to be equal at$T$... 2 Why did you not ask the help desk? F1 F1. I think the answer is that it's simply a deficiency in BBG's system. CSA curve is not built for TRY it seems. OIS should work though. May well be this curve also was not developed when you posted this. 2 The results are the same as long as you use the same data and common interpolation methods. For instance 12M Libor vs fixed swaps are less liquid than 12M Libor vs 3M Libor basis swaps so one usually uses the latter to bootstrap the 12M projection curve (after the 3M projection curve has been bootstrapped). Also it is straightforward to see that for ... 2 In addition to @dm63's answer maybe two references that are useful: I am not a FI/rates expert, but this book really helped me understand the basics of how things work in practice (not just in theory). And a nice introductory paper specifically on cross currency swaps. 2 First, we will write down the payoff of the mark to market basis cross currency swap. Second, we will do some exploring. Third, we hope that our exploration will be fruitful so that we can understand where we need to calculate the convexity adjustment. The forward curves required are: Domestic LIBOR curve$L^\text{d}\$, e.g., if the domestic currency is ...

2

First please keep in mind that EUR (and GBP) are quoted "cable". So if the USD EUR exchange rate is quoted as 1.1, for example, that means that (quotation or countercurrency) USD 1.1 = (base currency) EUR 1. Most other currencies are quoted the other way, so if the USD CHF rate is 1.1, that means CHF 1.1 = USD 1. An investor is "long" an option means ...

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