Well,probably this is a very basic question but I can't seem to figure it out. IRS XCCY Pay Receive Pay Receive1Y 11,55-12,05 10,45- 10,655Y 13,65 - 14,15 11,89 - 12,09Above you can see the Turkish 1 year and 5 year IRS and XCCY rates (against USD).What I wonder is why is the IRS rates are higher than the XCCY rates? Where does the yield difference come from? Is it the dollar interest rate or something else (CDS spread of turkey)? What does this difference tell us?Many thanks for your answers in advance.

I am not sure that I read you numbers correctly but it seems like the yield difference is due to the cross currency basis. there is an excess demand for USD that drives the CCY basis in the forward of the USD. So if you want to change Turkey Libor against USD Libor you need to give the person that hands over the USD a benefit. therefore the turkey yields are lower (ie you get less than the interbank rate). The reason for this can be very many but I guess today demand for USD by non US banks is a main force. See eg BIS quarterly review March 2008 and the 2009 (I think about money markets and need for USD). Please see this paper for a good intro to CCY:http://www.classiccmp.org/transputer/fi ... aps.pdfHTH and please come back if this does not answer your question, gotta sleep now!

many thanks freddiemac,I'll have a look at the article and will come back if i don't get it.

are the quotes very recent ? and if you go back to before the credit crisis , say 2006, do you still see similar or lower differences ?

yes the quotes are very recent.unfortunately i do not have any data before the crisis

Hi! I dont know the situation in Turkey but let me try to explain the XCCY basis from a general perspective. Suppose an investor has access to turkey unsecured lira funding at 3M AIBOR (ankara interbank offered rate, dont know if that exists but just take it as a general interbank rate in Turkey) but does not have access to 3M unsecured USD funding. The investor can, by buying USD in the spot market and selling USD on 3M FX forward create a synthetic 3M USD funding. This synthetic funding cost can differ from the 3M USD funding. The difference can be seen as a relative difference in the availability in USD funding between the panel banks of USD LIBOR and AIBOR. If a difference in availability exists then that should be seen in the spread between 3M USD Libor and the FX forward implied rate. Intuitively we can thus think of the spread between the actual USD LIBOR and implicit FX forward rate as reflecting the relative supply and demand of unsecured US dollar and lira funding.Note that the 3M transaction can be executed at each fixing – so by repeating the transaction 20 times (4 fixings per year) the 5Y swap can be replicated. The basis spread in the swap therefore reflects the market’s expectation of where these individual 3M spreads will come in over the next five years. This is similar to interpreting the fixed rate in a regular IRS as being the expectation of future interbank (Libor) fixings.It thus seems natural that there is a strong link between the cash markets (generating the initial lira in the example), the spot and forward FX markets and finally the basis swap market. In fact, the payments in a cross currency basis swap can be fully replicated through a series of FX foreign trades and two plain vanilla interest rate swaps.The Lehman paper that I posted explains the XCCY basis a bit differently. They explain it by first considering a default free world (with equal supply to different currencies I might add). In a default free setting a XCCY should trade flat (ie be zero). However imagine a credit risk world (or liquidity risky). In that setting a 3M XCCY should not trade flat. To see this split up the transaction into three different swaps:A XCCY swap of default free overnight ratesA money market basis swap of domestic o/n rates vs 3M domestic LiborA money market basis swap of foreign o/n rates vs 3M foreign LiborThis shows that the XCCY basis swap is a result of the difference between the local money market swaps ie the difference between the two term structures of credit (liquidity) risk. Since the basis swap is itself default free (not really true but you tend to collateralize all exposures so we can assume that) you want to be compensated for the credit risk difference that is inherent in the different fixings. Assume that have two countries A and B. The country A has very risk banks and Bs are default free. You would not want to exchange Libor rates flat in a default free swap since the stream of A would be worth more than B (you get compensated for a risk that you are not taking). Therefore you need to make an adjustment, hence the basis swap.In short the basis spread can be seen as the relative availability of USD between turkish and US banks (for simplicity I ignore the fact that there is also a question of the relative availability of lira between turkish and US banks. Given that USD is usually in high demand since it is a vehicle currency I don't know if that should have an impact but it becomes more difficult if you have to "equal" currencies eg AUD/CAD (but I think you would perhaps go through USD anyway)). It can also be seen as the relative credit (liquidity) risk between turkish and US banks (the banks that form the panels for the interbank fixings). I guess in this case it would be a combination between availability of USD and local basis spread that would be the explanation. Do you have access to Libor-OIS for turkey (is there an OIS market?)? In that case you can see the local basis spread and attribute the rest to USD availability. Does this help you? Please come back if you have any questions or if you find out more about the spread!

QuoteOriginally posted by: freddiemacThe Lehman paper that I posted explains the XCCY basis a bit differently. They explain it by first considering a default free world (with equal supply to different currencies I might add). In a default free setting a XCCY should trade flat (ie be zero). However imagine a credit risk world (or liquidity risky). In that setting a 3M XCCY should not trade flat. To see this split up the transaction into three different swaps:A XCCY swap of default free overnight ratesA money market basis swap of domestic o/n rates vs 3M domestic LiborA money market basis swap of foreign o/n rates vs 3M foreign LiborThis shows that the XCCY basis swap is a result of the difference between the local money market swaps ie the difference between the two term structures of credit (liquidity) risk. Since the basis swap is itself default free (not really true but you tend to collateralize all exposures so we can assume that) you want to be compensated for the credit risk difference that is inherent in the different fixings. 1) The Lehman paper proposes that the 'XCCY swap of default free overnight rates' should trade flat. Is this nessecarily true ? Can't there be a liquidity spread between 'default free' USD O/N and EUR O/N ?2) Given that it IS true that a 'XCCY swap of default free overnight rates' trades flat, then it implies that You can price a 'USD 3m' vs 'EUR 3m' ccy basis swap by a) forward estimating and discounting the USD leg with the USD-SWAP curve(since the float legs of the instruments in the USD swap curve rolls on 3m) b) pricing the EUR leg by discounting with EUR-SWAP and forward estimating with a 'pure' 'EUR-3m' forward curve(built from EUR-SWAP curve and, EUR 3m-6m basis quotes). These curves will be calibrated such that the 'EUR 6m' vs 'EUR 3m' basis swap prices back to the market. The legs of the EUR basis swap are priced such that: * A 'EUR-6m' FRN prices to par, discounting and forward estimating with EUR-SWAP (since the float legs of the instruments in the EUR swap curve rolls on 6m) * A 'EUR-3m' FRN prices OFF par, discounting with EUR-SWAP and forward estimating with 'EUR-3m Will the 'USD 3m' vs 'EUR 3m' ccy basis swap in (2) price back to the market quoted x currency basis spread though ? ( I don't have access to market data so can't try it out for myself)

QuoteOriginally posted by: DMoney<br1) The Lehman paper proposes that the 'XCCY swap of default free overnight rates' should trade flat. Is this nessecarily true ? Can't there be a liquidity spread between 'default free' USD O/N and EUR O/N ?2) Given that it IS true that a 'XCCY swap of default free overnight rates' trades flat, then it implies that You can price a 'USD 3m' vs 'EUR 3m' ccy basis swap by a) forward estimating and discounting the USD leg with the USD-SWAP curve(since the float legs of the instruments in the USD swap curve rolls on 3m) b) pricing the EUR leg by discounting with EUR-SWAP and forward estimating with a 'pure' 'EUR-3m' forward curve(built from EUR-SWAP curve and, EUR 3m-6m basis quotes). These curves will be calibrated such that the 'EUR 6m' vs 'EUR 3m' basis swap prices back to the market. The legs of the EUR basis swap are priced such that: * A 'EUR-6m' FRN prices to par, discounting and forward estimating with EUR-SWAP (since the float legs of the instruments in the EUR swap curve rolls on 6m) * A 'EUR-3m' FRN prices OFF par, discounting with EUR-SWAP and forward estimating with 'EUR-3m Will the 'USD 3m' vs 'EUR 3m' ccy basis swap in (2) price back to the market quoted x currency basis spread though ? ( I don't have access to market data so can't try it out for myself) The Lehman paper dates from a good few years ago.For more up to date info, see here:http://www.bis.org/publ/qtrpdf/r_qt0903f.pdf (BIS: The US Dollar shortage in global banking, Mar 2009)http://www.bis.org/publ/qtrpdf/r_qt0803h.pdf (BIS: The spillover of money market turbulence to FX swap and cross-currency swap markets, Mar 2008)To answer your questions:1) To get the xxcy adjusted spread between USDOIS and EUROIS, ask someone for quotes on USD OIS vs EUR 3M, USD 3M vs EUR 3M and EUR OIS vs EUR 3M. These are all available at least 5 years out with reasonably tight spreads, and when you put them together, see what you get. You should see EUR OIS significantly above USD OIS.2) Following on from this, USD3M is swapping to EUR3M minus 20 or 30 at least partly because USD are in demand, not just because of differences in the panel compositions between BBA USD LIBOR and EURIBOR. You can't derive xccy basis swap rates from other market variables, there is a supply and demand aspect to the basis swap spread.

Yes as has been discussed in other threads arkestra is right. There is "excess" demand for USD (in short because non US banks borrowed in USD because there was a funding advantage due to the deep and liquid markets in USD that was later swapped into the currency that banks actually lend out. Now when the there is counterparty risk/liquidity risk theses banks cannot get USD since US banks dont want to lend out their USD and the non USD banks do not have any natural inflow of USD eg in the form of deposits. Hence the Fed created USD swap lines to other central banks that lend out these USD to their local banks). But this is a somewhat special case since the USD is a vehicle currency. The Lehman paper makes a good argument for the theoretical XCCY, in reality there are all sorts of differences that needs to be taken into account. So dont take it too literally.. HTH

Thank you very much for such a detailed explanation freddiemac.And apologies for responding to you after such a long time.I don't know how I overlooked your post,but somehow I did...sorry for that.QuoteOriginally posted by: freddiemacHi! I dont know the situation in Turkey but let me try to explain the XCCY basis from a general perspective. Suppose an investor has access to turkey unsecured lira funding at 3M AIBOR (ankara interbank offered rate, dont know if that exists but just take it as a general interbank rate in Turkey) but does not have access to 3M unsecured USD funding. The investor can, by buying USD in the spot market and selling USD on 3M FX forward create a synthetic 3M USD funding. This synthetic funding cost can differ from the 3M USD funding. The difference can be seen as a relative difference in the availability in USD funding between the panel banks of USD LIBOR and AIBOR. If a difference in availability exists then that should be seen in the spread between 3M USD Libor and the FX forward implied rate. Intuitively we can thus think of the spread between the actual USD LIBOR and implicit FX forward rate as reflecting the relative supply and demand of unsecured US dollar and lira funding.Note that the 3M transaction can be executed at each fixing ? so by repeating the transaction 20 times (4 fixings per year) the 5Y swap can be replicated. The basis spread in the swap therefore reflects the market?s expectation of where these individual 3M spreads will come in over the next five years. This is similar to interpreting the fixed rate in a regular IRS as being the expectation of future interbank (Libor) fixings.It thus seems natural that there is a strong link between the cash markets (generating the initial lira in the example), the spot and forward FX markets and finally the basis swap market. In fact, the payments in a cross currency basis swap can be fully replicated through a series of FX foreign trades and two plain vanilla interest rate swaps.The Lehman paper that I posted explains the XCCY basis a bit differently. They explain it by first considering a default free world (with equal supply to different currencies I might add). In a default free setting a XCCY should trade flat (ie be zero). However imagine a credit risk world (or liquidity risky). In that setting a 3M XCCY should not trade flat. To see this split up the transaction into three different swaps:A XCCY swap of default free overnight ratesA money market basis swap of domestic o/n rates vs 3M domestic LiborA money market basis swap of foreign o/n rates vs 3M foreign LiborThis shows that the XCCY basis swap is a result of the difference between the local money market swaps ie the difference between the two term structures of credit (liquidity) risk. Since the basis swap is itself default free (not really true but you tend to collateralize all exposures so we can assume that) you want to be compensated for the credit risk difference that is inherent in the different fixings. Assume that have two countries A and B. The country A has very risk banks and Bs are default free. You would not want to exchange Libor rates flat in a default free swap since the stream of A would be worth more than B (you get compensated for a risk that you are not taking). Therefore you need to make an adjustment, hence the basis swap.In short the basis spread can be seen as the relative availability of USD between turkish and US banks (for simplicity I ignore the fact that there is also a question of the relative availability of lira between turkish and US banks. Given that USD is usually in high demand since it is a vehicle currency I don't know if that should have an impact but it becomes more difficult if you have to "equal" currencies eg AUD/CAD (but I think you would perhaps go through USD anyway)). It can also be seen as the relative credit (liquidity) risk between turkish and US banks (the banks that form the panels for the interbank fixings). I guess in this case it would be a combination between availability of USD and local basis spread that would be the explanation. Do you have access to Libor-OIS for turkey (is there an OIS market?)? In that case you can see the local basis spread and attribute the rest to USD availability. Does this help you? Please come back if you have any questions or if you find out more about the spread!

Hi,Is this the reason why I see a spread betweenhttp://www.bloomberg.com/apps/quote?ticker=KWSWO1:IND (This PROBABLY(correct me,if I am wrong) corresponds to an IRS Fixed KRW/Floating KRW,the quote corresponds to the Fixed Leg Rate)http://www.bloomberg.com/apps/quote?ticker=KWUSWO1:IND (This PROBABLY(correct me,if I am wrong) corresponds to an IRS Fixed KRW/Floating USD Libor,the quote corresponds to the Fixed Leg Rate)When I subtract the 1 year basis swap% (I dont have the ticker symbol) from the KWUSWO1,I get a value close to KWSWO1. How do we get the ccy value given the IRS and basis swap?