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Cross currency swap valuation

Author

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  • Boenkost, Wolfram
  • Schmidt, Wolfgang M.

Abstract

Cross currency swaps are powerful instruments to transfer assets or liabilities from one currency into another. The market charges for this a liquidity premium, the cross currency basis spread, which should be taken into account by the valuation methodology. We describe and compare two valuation methods for cross currency swaps which are based upon using two different discounting curves. The first method is very popular in practice but inconsistent with single currency swap valuation methods. The second method is consistent for all swap valuations but leads to mark-to-market values for single currency off market swaps, which can be quite different to standard valuation results.

Suggested Citation

  • Boenkost, Wolfram & Schmidt, Wolfgang M., 2004. "Cross currency swap valuation," CPQF Working Paper Series 2, Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF).
    • Handle: RePEc:zbw:cpqfwp:2
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    References listed on IDEAS

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    Cited by:

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    3. Mesias Alfeus, 2019. "Stochastic Modelling of New Phenomena in Financial Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2019.
    4. Alfeus, Mesias & Grasselli, Martino & Schlögl, Erik, 2020. "A consistent stochastic model of the term structure of interest rates for multiple tenors," Journal of Economic Dynamics and Control, Elsevier, vol. 114(C).
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    6. Alexander Libman & Vladimir Kozlov & André Schultz, 2012. "Roving Bandits in Action: Outside Option and Governmental Predation in Autocracies," Kyklos, Wiley Blackwell, vol. 65(4), pages 526-562, November.
    7. Becker, Christoph & Wystup, Uwe, 2005. "On the cost of delayed currency fixing announcements," CPQF Working Paper Series 3, Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF).
    8. Boeing, Philipp & Mueller, Elisabeth & Sandner, Philipp, 2012. "What makes Chinese firms productive? Learning from indigenous and foreign sources of knowledge," Frankfurt School - Working Paper Series 196, Frankfurt School of Finance and Management.
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    More about this item

    Keywords

    interest rate swap; cross currency swap; basis spread;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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