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Ronnie36
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Joined: February 11th, 2015, 8:53 am

MtM on Cross Currency Swaps

July 18th, 2016, 5:13 pm

Hi All,
I understand the process where we would use OIS Discounting on say a USD Fixed v Floating swap it the swap was collaterialised.  So we would project using a USD Libor Curve and Discount using the OIS curve
However, what happens on a Cross Currency Swap (Lets say Receiving Fixed RUB and Paying USD 3M Libor)?  If this is a MTM Swap where it is collaterialised in USD, would you still discount the USD side using OIS Discounting.  Our trader thinks yes, simply as its collaterialised and this is what he is receiving on the collateral, hence the trade should be discounted this way.  However our Risk manager says it should use the same curve (3M USD Libor) for projecting and discounting the USD side simply because the RUB side does not have a OIS curve so we should be consistent with both sides and use LIBOR discounting on RUB and USD side
Who is correct and why?
Many Thanks
Ronnie
 
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Martinghoul
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Joined: July 18th, 2006, 5:49 am

Re: MtM on Cross Currency Swaps

July 18th, 2016, 9:05 pm

The trader is correct...
 
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MaxwellSheffield
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Joined: December 17th, 2013, 11:08 pm

Re: MtM on Cross Currency Swaps

July 21st, 2016, 8:36 pm

What matters is how to discount the RUB leg, as it has to be done with the zero-coupon bond paying RUB collateralized with USD cash
The USD leg is obviously discounted with the OIS curve
 
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obyrnese
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Joined: April 24th, 2012, 4:30 pm

Re: MtM on Cross Currency Swaps

November 1st, 2016, 10:37 am

hi all,
has anyone any advice on how to treat mandatory break clauses on swaps? Say long dated 15 year swap in GBP but collaterlised in euro. mandatory break in 5 years - so must be unwound at this point with settlement of MTM. Should the valuation be taking the xccy adjustment into account on all flows out to the final end date or should the xccy adjustment only be applied to the flows up until the mandatory break?
Thanks
 
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Martinghoul
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Joined: July 18th, 2006, 5:49 am

Re: MtM on Cross Currency Swaps

November 1st, 2016, 12:52 pm

The mandatory break is just a cashflow, right?  Or am I missing something?
 
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cenperro
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Joined: October 7th, 2014, 1:33 pm

Re: MtM on Cross Currency Swaps

November 1st, 2016, 1:40 pm

@Martinghoul: The issue there is that one can see the Xccy basis effect in a fgn collateralized as linked to the funding of the trade and, in that sense, one could argue that the basis should not enter into the break date valuation.

Now I have the doubt, should the break value be including or excluding of Funding Costs? If I have to bet I would go for 'including of' and , that way, including the Xccy basis effect in the valuation but , right now, I am not 100% sure if there is any  'standard' but, in mathematical terms, I think the basis must be included in order to get a sounded result.
 
 
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Martinghoul
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Joined: July 18th, 2006, 5:49 am

Re: MtM on Cross Currency Swaps

November 1st, 2016, 2:21 pm

Sure, I do understand that, but I am just having trouble with the reasons for why this break clause should be any different to a regular cashflow.
 
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cenperro
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Joined: October 7th, 2014, 1:33 pm

Re: MtM on Cross Currency Swaps

November 1st, 2016, 2:33 pm

If I am not wrong, the mandatory break should end up paying the remaining MtM. So it is a cashflow, but the value of that 'cashflow'; needs to be calculated. Should that remaining MtM include Funding costs (FC)? That's the 'tricky' question as there is no more deal after the breakdate, no more collateral exchanges. If that is the case (FC is included) we should include the basis in the calculation of that MtM. If we 'decided' that those are not to be included we can just discount the remaining cashflows (To calculate the MtM as of the break date) using GBP OIS without any reference to the original collateralization.  Notice that it is not how we discount the 'cashflow' itself (taking collateral into account) but how we calculate the value of said cashflow (the MtM). Having said that , I think the only sensible thing to do is to include the collateral effect...but would not bet my house on that :-) 

by the way, @Martinghoul,  I am not trying to be patronizing  so apologies if it sounds like that (just in case)
 
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obyrnese
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Joined: April 24th, 2012, 4:30 pm

Re: MtM on Cross Currency Swaps

November 2nd, 2016, 3:58 pm

thanks @cenperro thats exactly the crux of it...and i was leaning toward applying the xccy myself
at the mandatory break date the value of the trade is settled and the question is whether this value discounts the future flows by adjusting for the xccy collateral that would be posted if it wasnt terminated
i thought an analogous situation is that of a standard valuation with euro coll posted on a gbp swap - if a counterparty unwinds/terminates the trade early, it is at the value  that has been calculated by discounting all cash flows adjusted by the xccy basis to euro, or is there suddenly an adjustment to unwind the basis that has been applied
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