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Cross basis spread adjustment
Hi all, I have a question about the cross currency basis swap spread. For example, we have a swap that exchange 3 month EURIBOR minus 32 bps for 3 month USD LIBOR. As far as I understand, the spread quoted by ICAP is applied on the Euro side. How to calculate the spread if it is applied on the USD side? Simply add 32 bps does not seem to be right.
Cross basis spread adjustment
Simple approximation is just discount the 32 bps using your ? curve and figure out what the corresponding annuity is in USD. If you want to get more subtle you need to incorporate the term structure of basis spreads into your discounting. Think about setting up a portfolio of USD and EUR OIS trades (assuming this is done on a collateralised basis) and a portfolio of xccy swaps that will give you EBOR flat and then the exactly correct spread over USD should fall out.