# Tag Info

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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 ...

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 ...

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

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 ...

3

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 ...

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

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 ...

3

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 $P$ ...

2

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

2

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 ...

2

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. ...

2

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$... 2 In addition to @dm63's answer maybe two references that are useful: I am not a FI/rates expert, but this book really helped me understand the basics of how things work in practice (not just in theory). And a nice introductory paper specifically on cross currency swaps. 2 The results are the same as long as you use the same data and common interpolation methods. For instance 12M Libor vs fixed swaps are less liquid than 12M Libor vs 3M Libor basis swaps so one usually uses the latter to bootstrap the 12M projection curve (after the 3M projection curve has been bootstrapped). Also it is straightforward to see that for ... 2 First, we will write down the payoff of the mark to market basis cross currency swap. Second, we will do some exploring. Third, we hope that our exploration will be fruitful so that we can understand where we need to calculate the convexity adjustment. The forward curves required are: Domestic LIBOR curve$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 ...

2

It is not very clear what you are asking. On fixing date, the floating leg has a duration that is approx. the duration of a ZCB with maturity equal to the next payment. Anyway, the pricing of the floating leg is always the discounting of forward rates so the fixing date has not a direct impact on the price but rather on the interest rate sensitivity.

2

This NEBR paper argues that the anomaly reflects a mismatch between observable but imperfectly matched market rates (for FX and interest rates) - versus unobservable (and thus untradeable) "risk-free", where arbitrage is not possible and CIP = 0. De facto, this creates a bias for countries with higher interbank rates to exhibit more positive xccy ...

2

I just found one possible reason online: markets like Australia and New Zealand where local interest rates are relatively high and there is little interest in offshore investment.

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I think it has something to do with differences in how Australian banks and EU/JP banks finance themselves. Probably you need someone who is an expert in Australian and European banking structure to explain it properly. I'll attempt an overview: Basically Australian banks have mostly AUD assets, when they issue USD bonds most of the USD proceeds are not ...

1

If we work through this practically, a hypothetical derivative under IFRS9 cash flow hedge should be representative of the underlying, henceforth the MTM CCS must be mark to market on the currency side opposite to that of the hedged instrument. For example, a EUR corporate might issue a yankee bond in 100mm USD and cross currency swap it back to EUR under a ...

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

Basis is almost always calculated on the non-usd leg - which explains why your signs are the wrong way around.

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Say a US investor with 1mm USD wants to buy a 10Y Volkswagen bond in EUR priced at 100 EUR with a 5% coupon. First that investor needs to acquire EUR for purchase without exposing themselves to FX risk. To do this they execute a cross-currency swap. The investor will pay 1mm USD and receive say 1.1mm EUR with the agreed cashflows: he will receive USD 3M ...

1

Cross currency swaps (XCSs) are LIBOR instruments. The difference is the difference in 7y swapspreads in the two currencies. A swapspread is the difference between the treasury yield and LIBOR in each currency.

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A standard XCCY minus an “XCCY without back notional exchange” is a currency forward struck at today’s spot. The difference will be positive or negative depending on how the forward FX compares to the spot.

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PnL variability and risk reliability should not be a problem if you have well designed control (knot) points and enough data. See Darbyshire: Pricing and Trading Interest Rate Derivatives. I would advise trying to build the fundamental constructs, 1M and 3M for the following reasons; You probably have a better subjective opinion on the interpolation of ...

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