Serving the Quantitative Finance Community
Basis Swap Basics
What does it mean when financial press refers to "a widening of the Basis Swap"?
Basis Swap Basics
A basis swap is exchanging cash flows calculated by using different floating reference rates, so a widening basis swap would mean a widening of the risk difference of these two reference rates.
Basis Swap Basics
Hamb is right. So for example in a basis swap you may be exchanging 3M USD Libor for 6M USD Libor.The term "basis swap" may also loosely be used to refer to the cross-currency basis swap. For example an investor wishing to exchange USD libor for JPY Libor.In both of the above cases a basis spread is often quoted in the market which may be applied to construct the discount curve.Rgds,Red
Basis Swap Basics
Thanks guys for the response.My confusion arose from recent research which stated:"The basis swap had widened, making Kangaroo issues (offshore companies issuing Australian bonds in Australia) more attractive for OFFSHORE ISSUERS."Im assuming this means:offshore issuers can now swap out the Australian coupon payment they must pay to investors (based on an Australian reference rate) and receive a higher local reference rate (such as LIBOR), booking a profit?