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Basis Swap Basics
Posted: January 6th, 2005, 11:21 pm
by malley12
What does it mean when financial press refers to "a widening of the Basis Swap"?
Basis Swap Basics
Posted: January 7th, 2005, 2:15 am
by hamb
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
Posted: January 11th, 2005, 7:31 pm
by RedAlert
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
Posted: January 11th, 2005, 8:44 pm
by malley12
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?