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pj


Total Posts: 3555
Joined: Jun 2004
 
Posted: 2020-09-14 09:38
Say you have a complicated FX swap in CHF/EUR.
You currency is CHF.
How does one choose the discount curve?


The older I grow, the more I distrust the familiar doctrine that age brings wisdom Henry L. Mencken

nikol


Total Posts: 1230
Joined: Jun 2005
 
Posted: 2020-09-14 10:22
First, you work out each currency separately:
Each currency discount link to OIS (CHF OIS, EUR OIS)
Each currency payout link to its IBOR (be aware it will disappear)

The same ideas apply about collateral.

After that you involve CHF/EUR cross currency spread to account for exchange between the two legs.

ref papers: Fujii, Takahashi. somewhere there is thesis by Fujii.

UPD. Error fix: base spread to cross currency spread.

pj


Total Posts: 3555
Joined: Jun 2004
 
Posted: 2020-09-14 10:32
Thank you, nikol!
Just what i need.
Yes, I have heard that IBOR might disappear.

The older I grow, the more I distrust the familiar doctrine that age brings wisdom Henry L. Mencken

nikol


Total Posts: 1230
Joined: Jun 2005
 
Posted: 2020-09-14 14:51
U r welcome.
Be aware of my error (too quick) Hammertime
Bad me: not basis spread, but cross-currency spread.

IBOR comes as "3d party" benchmark which is used to fix payout. Hence you will have to change IBOR to the new index in the contract.

Main idea with discount per currency is that it's linked to that currency account and you should not have arbitrage with cash from other products in same currency, e.g. fix-float IRS, to avoid internal arbitrage.

One step further, market based discount linked to OIS will give you market price, but not YOUR fair price, as you very likely have different funding and you have to know how much you are different from the market. That come withing XVA (CVA, FVA, etc) and these sort of things.

pj


Total Posts: 3555
Joined: Jun 2004
 
Posted: 2020-09-14 15:03
I was reading too quick and automatically parsed it as cross-currency
spread
Cool

The older I grow, the more I distrust the familiar doctrine that age brings wisdom Henry L. Mencken

nikol


Total Posts: 1230
Joined: Jun 2005
 
Posted: 2020-09-14 15:35
Double error information transmission problem.
We have proved that!!!

But 2 idiots dont make 1 wiseman. They rather kill him.)))

tomgailey
Banned

Total Posts: 13
Joined: Oct 2020
 
Posted: 2020-10-02 11:31
great)
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