scenario:I S/B 100 mio USD ag JPY (I pay) at -720 spot ag 4YR --------------Hedging:1/ Basis Swaps -10 / -20 (MIRS1 quotes)>>> I would Receive Yen floating quarterly fix -20bp and pay dollar floating quarterly fixand2/ USD IRS 2.8890 / 2.9310 (USDAM3LIRS quotes)>>> I would pay 100 mio usd at 2.9310% fixed and receive floating (quarterly fix)3/ JPY IRS 1.04500 / 1.00500 (MIRS2 quotes) >>> I would receive 100 mio usd amount of Yen at 1.04500% and pay floating (quarterly fix)

does this seem right?perfect hedge?

It does look right, one question though: why does the hedge need to be this 'package' of 1 basis swap and 2 single currency swaps? Why not just a x-ccy (fixed/fixed) ?

what do you mean by fixed ag fixed?could you pls give an example? (you might be right)

The net effect of your hedge "structure" is: pay USD @ 2.931% and receive JPY @ 1.045% - 20bpsWhat are the quotes for a 4yr fixed/fixed x-ccy (AUD/JPY) swap - doesn't it have the same effect i.e. hedge the IR risk

sry i am still learning so i dont know which quote you are talking about when you say fix / fix could you show me an example? the -20bp is on the quarterly fix.USD: I pay fix and receive floatingJPY: I receiev Fix and pay floatingBasis: I pay 3M USD LIBOR floating and Receive 3M JPY LIBOR Floating - 20bpdoing this to hedge both the interest rate risk and the basis risk. I am assuming if you do a fix fix, you will still be left out with a basis risk?and if you do a fix / fix what's the frequency? wondering if this would give the same rates structure and allow a basiss swap hedge?

QuoteOriginally posted by: marciovsIt does look right, one question though: why does the hedge need to be this 'package' of 1 basis swap and 2 single currency swaps? Why not just a x-ccy (fixed/fixed) ?x-ccy basis swaps more liquid out past a year: http://www.bis.org/publ/qtrpdf/r_qt0803h.pdf great article in general btwAs stated, the net effect of the package is pay usd fix, receive jpy fix every 6m: original deal hedged. done. so why not enter into a single swap that pays usd fix and receives jpy fix (fx swap) and be done with it!? the answer to that question is above :-)mtm basis risk comes into play because you are splitting the structure up into 3 trades. in the original deal there is no basis risk, hence a truly perfect hedge would have no basis risk.

Hi, I know this post is fairly old.But I'm new at this and would like to clarify something about the original post.for "3/ JPY IRS (MIRS2 quotes)" aren't these based on semi-semi? so it wouldn't be Rec Fixed vs Pay Float (qtr fix), it would be with semi fixings instead....?And therefore, to completely hedge, you'd need a 4th piece.... a 3M vs 6M Yen basis swap.Can someone verify this please. And what would be the direction to hedge the 3/6s? Rec?Thanks

Hi there, there is one small additional point i'd like to make on the initial post although i know it's old.FX Swaps have longer duration, because, in a way there is a bullet interest payment incorporated in the forward rate at the very end; where as in basis swaps and irss there are coupons along the way making their duration shorter.Therefore to perfectly manage the rate risk of this portfolio one would have to adjust the notionals according to the durations. (so 100 mio vs 100 mio as in the original example would leave a residual rate risk.)Although that duration risk could be more negligible in the usd/jpy basis swap example below, it's important when quoting long term fx swaps in EM pairs such as USDTRY, USDRUB, etc and than hedging them with cross-currency + IRS.