wilmott.com

I'm trading in USD. Today I buy a EUR depo for EUR 100mm, and I offset my XCCy exposure by entering into a CC Swap at the same time, 100mm. I have hedged my principal exposure perfectly for the life of the deposit. When I test FX sensitivity on these positions I would imagine that they should therotically net off against one another. However they do not. I am valuing my Bond using a EURIBOR curve & the EUR side of my CC Swap using a USD/EUR cross currency swap. From a trading point of view I am correct, but from a reporting point of view I have FX sensitivity that does not really exist. Is it normal practise here to price both these trades off the same curve for consistency once the two trades are matching? Are these adjustments common place? Does it make sense to value both trades using the cross currency curve or both using the Euribor curve?

Indeed, risk managers will value both sides using the Euribor curve adjusted by the EUR XCCY basis (on the EUR side of each trade). Typically there is a control group checking to make sure the trader's curves have the xccy spread implicitly included in their rates. Discrepancies should be small.