Cross currency swap basis spread
Posted: May 30th, 2014, 1:31 pm
Hi guys,I would like to ask a question regarding an uncollateralized Dollar/Yen 3-month Float vs Float cross currency swap. Regarding the treatment of the cross currency basis spread, I would like to simplify the case by assuming 3-month US Libor rate as the discount rate for the dollar leg, equivalent to the dollar payment rate. In this way, based on the formula in Fujii etc (2010) the CCS basis spread is solely determined by the yen Libor-OIS spread and can be expressed as the average yen Libor-OIS spread for various maturities. Therefore, the yen leg discounting rate would simply be the yen OIS rate.My question is: when expressing the forward exchange rate process in terms of yen and dollar zero coupon bonds, shall I choose yen Libor and dollar Libor zero coupon bonds or yen OIS and dollar OIS zero coupon bond or yen OIS and dollar Libor zero coupon bond as I assume the dollar Libor as the dollar leg discounting rate?Thanks very much.