QuoteOriginally posted by: ancastIn theory collateral should not play a role in determining the par swap rate, which should be independent from the collateral currency (the valuation IS, instread). Well, so far I considered, that market par swap rates are just average of the market expectation of the Libor level in the future. In case of EUR, you can assume, that it was calculated under OIS discounting. Then, in my opinion if you quote to your counterparty an IRS rate, but you know, that the collateral will be e.g. in USD, than I whought I would take market expectation of future Euribor stripped with OIS, and then discounted that with XCCY curve derived from Fed Fund curve. I would obtain different level of the swap rate to quote, which would include the cost of collateral funding. For the moment I skipped the quanto adjustment on forwards, but as I understand I don't have instruments to hedge this adjustment.

QuoteOriginally posted by: ancastMaybe it could be of some help the note I wrote about the problem of collateral posted in a different currrency. You'll find it here.In theory collateral should not play a role in determining the par swap rate, which should be independent from the collateral currency (the valuation IS, instread). This is at least what comes out from the inspection. I do not agree with thedoc, since the projection curve will change if the collateral is different, although the par swap rate should be the same. The difference will be nil only of the basis of the CCSs in zero. Anyway, you can read the results in the paper. If you are not interested in equity styll contracts, you can skip the first ten-ish pages.So if several different counterparties asked you to quote a PAR rate, you would give them the same rate regardless of collateral agreement? I think this is wrong, and would lead to arbitrage opportunities.

Thedoc,there is no arbitrage since the Liquidity Value Adjustment (that is, the difference between the rate you can invest/borrow and that you earn on the collateral) is zero in any case, independently of the currency of the collateral. Seasoned contracts DO depend on the currency you post collateral in, but contracts with not cash exchange at the inception (eg.: FRAs and swaps), should be quoted at the same fair rate.Clearly if you add also the Funding Value Adjustement, things may change, since usually a bank has an easier access in one market than in others, so that the FVA is affected by the currency chosen for collateral. But this is not related to arbitrage opportunitites, rather to costs related to the position.Anyway, things are better explained in the paper I linked in my post before.

I thought the effects were only noted in specific cases. E.g. for a vanilla IRS then I am not sure how much the CSA really changes the quotes as the PV is zero at inception (if on market). For swaptions etc I believe it makes a difference due to forward premiums etc.Interesting subject...

QuoteOriginally posted by: rmaxI thought the effects were only noted in specific cases. E.g. for a vanilla IRS then I am not sure how much the CSA really changes the quotes as the PV is zero at inception (if on market). For swaptions etc I believe it makes a difference due to forward premiums etc.Interesting subject...Exactly Rmax.Now, the second big assumption one has to make is that the zero-value contract at inception has to include the LVA. If the zero value is the equivalent risk-free value of the contract (assuming for generality sake that the collateral rate is different from the risk-free rate), then the collaterlized swap (that includes the LVA) is not zero and the the par swap rates will differ, as there will be the LVA adjustment having an impact on the risk-free rate. In the paper (and the other one related to this, cited in the references) I assume that market quotes are referred to contracts whose CSA is collateralized with risk-free = collateral rate. Alternatively one may assume that quoted prices are for a collateralization based on the value of the contract which include the LVA (ie: the effect of the collateralization itself), so that the LVA is zero even if coll. rate is not equal to risk-free rate (in this case the NPV of the collaterlized contract is zero, thus the LVA will be zero as well).

Depending on your starting point, the terms of your CSA can either have an effect on the fwds or the par rates. So yes, it's conceivable that different CSA terms may imply different par rate quotes. I have seen it in the mkt, although I'd say it's not too common.

QuoteOriginally posted by: MartinghoulDepending on your starting point, the terms of your CSA can either have an effect on the fwds or the par rates. So yes, it's conceivable that different CSA terms may imply different par rate quotes. I have seen it in the mkt, although I'd say it's not too common.Is this because the anticipated effects of the collateral agreement is being included in the pricing?

QuoteOriginally posted by: rmaxQuoteOriginally posted by: MartinghoulDepending on your starting point, the terms of your CSA can either have an effect on the fwds or the par rates. So yes, it's conceivable that different CSA terms may imply different par rate quotes. I have seen it in the mkt, although I'd say it's not too common.Is this because the anticipated effects of the collateral agreement is being included in the pricing?Not sure what you mean... It's more a function of a philosophical choice you make about what rates are "real", so to speak.

I have an additional question....Let me cast it into the context of a GBP swap say.Suppose I have a standard GBP swap.If it is uncollateralised, I simply project and discount using the same If it is collateralised in GBP, I discount using GBP OIS (ie SONIA) and project using the Curve A (where Curve A is built using the OIS curve to discount).If it is collateralised in USD, I project using the same Curve A but discount using Curve B (where Curve B is the FX discounting curve built from GBP-USD basis, USD OIS curve, dual-bootstrapped USD curve and Curve A).My question is tht, if this swap is PLN instead of GBP where we do not observe the PLN-USD basis, but yet the swap is collateralised in USD, what do we do in this case?Thanks for your help on this....

QuoteOriginally posted by: quantericMy question is tht, if this swap is PLN instead of GBP where we do not observe the PLN-USD basis, but yet the swap is collateralised in USD, what do we do in this case?Run for the hills? There's no good answer, so do whatever you feel is the right thing to do...