SERVING THE QUANTITATIVE FINANCE COMMUNITY

 
User avatar
Josip76
Topic Author
Posts: 8
Joined: March 3rd, 2011, 8:54 am

CCY Basis Adjustment - how CCS pricing is impacted

October 9th, 2012, 12:14 am

Hi,Im having a very difficult time understanding how the inclusion of the CCY basis curve, post credit crisis, has modified the pricing of CCS.For example, today (just as before the crisis) when a EUR/USD CCS is entered into party A borrows X?S USD from, and lends X EUR to, party B. During the contract term, A receives EUR 3M Libor + α from, and pays USD 3M Libor to, B every three months, where α is called the cross currency basis spread, and it is agreed upon by the counterparties at the start of the contract. So alpha is the spread added to the EUR LIBOR curve to make the trade fair at the onset.Now, post crisis, is what has changed that the cross ccy basis spread is considered in the pricing through the life of the deal. So say the above deal was entered into 3 months ago and it is being re-priced today. Do we add a basis spread to the EUR LIBOR rate when forcasting future cash flows, in order to represent the changes in the FX forward rates that we are forcasting today? So in total the EUR forward rate used to calculate the forward cash flow at each point is actually the EUR LIBOR rate + alpha (set at onset of trade) + BA (basis adjustmet)? Please let me know if my understanding is correct or am i completely wrong here, thanks
 
User avatar
kelang
Posts: 46
Joined: November 14th, 2011, 4:53 pm

CCY Basis Adjustment - how CCS pricing is impacted

October 9th, 2012, 1:17 pm

check out the mark-to-market xccy swap...
 
User avatar
Josip76
Topic Author
Posts: 8
Joined: March 3rd, 2011, 8:54 am

CCY Basis Adjustment - how CCS pricing is impacted

October 17th, 2012, 2:00 am

Yes i am familiar with constant maturity swaps where you are performing a notional adjustment. i do understnad that you need four curves to price a CCS two OIS for discounting and two index based for forwarding and that the fair swap spread is calculated taking into account the impact of all of these and the fx rate. However, what i am unclear on is if you can form an addative adjustment to get back to using just two curves instead of four so to recover no arbitrage condition? and if so how do you do this?
 
User avatar
japanstar
Posts: 73
Joined: July 13th, 2009, 7:07 am

CCY Basis Adjustment - how CCS pricing is impacted

October 19th, 2012, 5:25 am

What's the problem with the 4 curves approach?
 
User avatar
kelang
Posts: 46
Joined: November 14th, 2011, 4:53 pm

CCY Basis Adjustment - how CCS pricing is impacted

October 19th, 2012, 1:24 pm

indeed, you can do some good approximations by manipulating the spreads, check some docs from bloombergbut anyway approximation is just approximation..., it might give you trouble when things change
ABOUT WILMOTT

PW by JB

Wilmott.com has been "Serving the Quantitative Finance Community" since 2001. Continued...


Twitter LinkedIn Instagram

JOBS BOARD

JOBS BOARD

Looking for a quant job, risk, algo trading,...? Browse jobs here...


GZIP: On