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    Swap Seminar 1695006544

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    Jaehyun Kim
    The document provides an overview of cross currency swap trading and pricing, including formulas and examples for pricing cross currency swaps using yield curves, discount factors, and cash flows. It discusses key concepts such as par rates, spreads, and mark-to-market features and includes links to detailed notes and a demo pricing workbook.

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    Swap Seminar 1695006544

    Uploaded by

    Jaehyun Kim
    21 views30 pages
    The document provides an overview of cross currency swap trading and pricing, including formulas and examples for pricing cross currency swaps using yield curves, discount factors, and cash flows. It discusses key concepts such as par rates, spreads, and mark-to-market features and includes links to detailed notes and a demo pricing workbook.

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    Swap_Seminar_1695006544

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    The document provides an overview of cross currency swap trading and pricing, including formulas and examples for pricing cross currency swaps using yield curves, discount factors, and cash flows. It discusses key concepts such as par rates, spreads, and mark-to-market features and includes links to detailed notes and a demo pricing workbook.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    21 views30 pages

    Swap Seminar 1695006544

    Uploaded by

    Jaehyun Kim
    The document provides an overview of cross currency swap trading and pricing, including formulas and examples for pricing cross currency swaps using yield curves, discount factors, and cash flows. It discusses key concepts such as par rates, spreads, and mark-to-market features and includes links to detailed notes and a demo pricing workbook.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 30

    Cross Currency Swap Trading & Pricing

    Formulae - A PowerPoint Overview with Excel


    Pricing Examples

    Nicholas Burgess

    nburgessx@gmail.com

    26th March 2019


    Executive Summary

    Swap Preliminaries
    • Interest Rate Swaps
    • Yield Curves
    • Rates Trading, Pricing & Risk

    Xccy Swaps
    • Xccy Swap Theory - Formulae
    • Xccy Swap Practice - Pricing Demo

    Detailed Notes
    https://ssrn.com/abstract=3278907
    Interest Rate Swaps Market

    • Notional Outstanding $200tn: Traded in large volume


    • Very Liquid : Bid-Offer 1/10th Basis Point i.e. 0.001%
    • Swap Cashflows: Each set of cashflows called the trade ’leg’
    • Typically Fixed-Float: or Float-Float for Basis Swaps
    • Payer/Receiver: of Fixed cashflows, but long/short the risk
    • Quoted at Par: Zero upfront cost
    Swap Pricing Terminology

    Pricing Terminology
    • PV: Present Value or Price
    • Basis Points (bps): 1/100th of a percent i.e. 1bps = 0.01%
    • Par Rate: The fixed rate in % to make the trade PV zero
    • Par Spread: The float spread in bps to make trade PV zero
    • PV01: PV sensitivity to forward rates, also called Annuity
    • DV01: PV sensitivity to forward rates and discount factors

    Quotation
    • New Deals: Quoted as a par rate or a spread over Treasuries
    • Bespoke Deals: Quoted as a PV, since not trading at par
    • Basis Trades: Float-Float deals are quoted as a par spread
    Bloomberg Trading Venue
    Bloomberg Trading Portal, BBTI - Interest Rate Swaps
    Swaps as a Spread over US Treasuries
    Par Rate = US Treasury Yield + Spread (Bps)
    Interest Rate Swap Pricing
    Bloomberg Swap Manager, SWPM

    Par Swap - 5Y Receiver vs USD3ML


    IRS Pricing Formula
    Other Swap Types

    1 Interest Rate Swaps - Rate Hedging


    2 Tenor Basis Swaps - Frequency Matching
    3 Xccy Swaps - Funding in another Currency
    4 Asset Swaps - Bond & Corporate Financing
    5 Credit Default Swaps - Hedging Counterparty Risk
    6 Inflation Swaps - Inflation Hedging

    Libor Benchmark Rate Reform [New Swaps]


    - Risk-Free Curves (RFRs)
    - Alternative Reference Rates (ARRs)
    - SOFR Swaps - Secured Overnight Funding Rate
    Xccy Swap Overview
    Bloomberg MtM Xccy Swap USD/EUR

    USD/EUR MtM Xccy Swap 1Y


    Bloomberg Xccy Swap - USD Leg

    USD/EUR MtM Xccy Swap 1Y - USD Leg


    Bloomberg Xccy Swap - EUR Leg

    USD/EUR MtM Xccy Swap 1Y - EUR Leg


    Yield Curves, Fwd Rates & Disc Factors

    Curve Construction & Dependencies


    1 First Calibrate Standard/Native CSA Curves
    2 Then build USD CSA Curves using Xccy Swaps
    3 Then build Non-USD CSA Curves using FX Fwd Invariance

    CSA Discount Factors


    • Forward rates are independent of CSA
    • Discount factors depend on CSA

    Standard/Native CSA Disc Factors


    • Native CSA discount factors same as No CSA
    • Example: USDOIS USDCSA = USDOIS
    Curve Dependency Tree
    Example: EURDF with GBP Collateral
    EUROIS-GBPCSA
    Xccy Curves - Discounting with Collateral

    USD CSA Discount Factors


    • Implied directly from market Xccy Swap Spreads
    • Typically Xccy trades have a USD leg and post USD collateral

    Example: USD/EUR Xccy


    • We know: Par Spread, USDOIS, USD3ML and EURIBOR3M
    • from which we imply EUROIS-USDCSA
    Xccy Trade - Curves & DF Requirements
    SWPM -FLFL -XCCY -MTM -USD 1MM 5Y
    Non-USD CSA Curves
    FX Forward Invariance
    For Non-USD CSA calculations we assume FX forward invariance

    Non-USD CSA Discount Factors


    • Use LHS to imply from using FX Forwards
    • Use RHS to imply from Xccy Basis quotes
    Replication Logic
    • We can create a synthetic EUR/JPY forward FX rate
    • Borrow JPY, buy spot EUR/JPY and deposit the EUR
    • The forward FX rate is constant for any given CSA
    Xccy Swap Pricing Formula
    FOR/DOM Xccy Price

    Example: USD/EUR MtM Xccy Swap


    • Valuation Currency: USD
    • Collateral Currency: USD
    • Reset Currency: USD
    • Quotation: EUR Par-Spread
    • EUR Leg: 3M EURIBOR with EUROIS-USDCSA discounting
    • USD Leg: 3M USD Libor with USDOIS discounting
    Xccy Swap Pricing Formula [Expanded]
    Xccy Features: MtM

    Marked-to-Market
    • Xccy swaps present users with FX risk
    • The MtM feature mitigates this
    • MtM Xccy Swaps track and reset the FX rate each period
    • FX losses on the Notional reimbursed on each FX fixing date
    Understanding the Notional
    Xccy Coupon Notional
    We always scale the initial notional by Ψi
    Ni = N0 Ψi
    Notional Reset Factor
    Ψi = α(t0 , C Leg ) β(ti , C Leg )
    | {z } | {z }
    Valuation Adj FX Reset Adj

    Spot FX Valuation Adjustment, α

    Forward FX MtM Reset Adjustment, β


    Notional Resets & Exchanges

    Initial & Final Exchanges


    Borrow funds at start and return at end

    Initial Exchange = N0 Ψ0 P(0, t0 )

    Final Exchange = −N0 Ψn P(0, tn )


    Notional FX Resets
    FX immunized: FX losses reimbursed each FX fixing date

    FX Reset = Ni P(0, ti ) − Ni+1 P(0, ti )


    = N0 Ψi P(0, ti ) − N0 Ψi+1 P(0, ti )
    Coupon Pricing
    Floating Cashflows

    n
    X
    PV (Coupon) = N0 Ψi (li + s)τi P(0, ti )
    i=1
    Xn n
    X
    = N0 Ψi li τi P(0, ti ) + s N0 Ψi τi P(0, ti )
    i=1 i=1
    Xn
    = N0 Ψi li τi P(0, ti ) + s Annuity
    i=1

    where
    n
    X
    Annuity = N0 Ψi τi P(0, ti )
    i=1
    Xccy Par Spread

    Par Spread, s
    Applied to the Non-USD Leg
     
    PV( Trade with No Spread )
    s=−
    Annuity( Non-USD Leg )

    where
    n
    X
    Annuity = N0 Ψi τi P(0, ti )
    i=1
    Bloomberg: Xccy Quotes
    Bloomberg Par Rates
    Xccy Pricing Demo Workbook

    Demo Workbook:
    5Y USD/EUR MTM XCCY SWAP USD 1MM
    Appendix - Useful Resources
    References

    1. Collateralization & CSA Fundamentals


    https://ssrn.com/abstract=3035648
    2. Discounting with Collateral
    https://ssrn.com/abstract=3009281
    3. An Interest Rate Swap Primer
    https://ssrn.com/abstract=2815495
    4. Cross Currency Swaps
    https://ssrn.com/abstract=3278907
    5. Interest Rate Modeling: Volume I-III
    Atlantic Financial Press - Vladimir Piterbarg
    6. Interest Rate Models - Theory & Practice
    Springer - Damiano Brigo, Fabio Mercurio

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