The price of a Cross Currency Swap and Cross CCY Real Rate Swap takes into account the cross currency basis spread market data, which defines the spread between the floating rate of each currency.
You can see this data in the Basis Swap Curve window (which is accessed by clicking the Basis Swaps button in the pricing page).
For each tenor displayed you see the spread that will be added to or subtracted from the index when swapping it with the other index. So if you look at the basis swap curve for a 3M EUR index vs 3M USD index flat, if the 1Y tenor is set to -37.9, this means that the market values the exchange of 3M EUR EURIBOR rates minus 37.9 basis points versus the 3m USD LIBOR index flat; if the 1 Y tenor is set to 2, this means you add 2 basis points to the 3m EUR EURIBOR rates in exchange for 3M USD LIBOR rates.
This data is also used to calculate the discount factor for the non-flat currency in the currency pair of the instrument.
Although each currency has its own default yield curve from which the discount factors (i.e., the factors that are used as a multiplier to convert a future cash flow to its present value) are calculated, for a cross currency swap, the discount factor for one of the two currencies (i.e., for the non-flat currency) is taken from a cross currency basis spread curve which is based on the currency’s default curve plus the cross currency basis swap curve1. The cross currency basis swap curve is always associated with the currency according to the market convention, so for example, if the basis swap curve is for the 3M EUR Basis swaps vs 3M USD Flat the cross currency basis swap curve is associated with the EUR (because in the EUR/USD currency pair the EUR is the non-flat currency).
The system assigns the cross currency discounting to the non-flat currency in any given currency pair.
How does the system determine which is the non-flat currency? This is done according to market convention, as follows:
If the currency pair contains USD, the non-flat currency is the non-USD currency.
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This is true for all currency pairs which contain USD except for USD/MXN. In that case the USD currency is the non-flat currency. |
If the currency pair contains EUR, the non-flat currency is the non-EUR currency.
For all other currency pairs, the non-flat currency is the minor currency (where the minor currency is determined according to the FX major/minor market convention).
So, for example, in the:
USD/JPY currency pair, the non-flat currency is JPY.
EUR/USD, the non-flat currency is EUR.
EUR/GBP, the non-flat currency is GBP.
You subsequently see this data in the pricing page in the Spread field for the right-hand leg, but only if the deal is defined as a float-float swap and if it is defined as described in the Basis Swap Curve window.
In the Basis Swap Curve page you can:
Choose to use your own market data source. See Changing the Market Data Source in the Basis Swap Curve Window.
Control which tenors (including the short tenors—1M, 3M, 6M and 9M) are used in the cross currency basis swap curve, thereby affecting the cross currency basis spread market data that is used to price the cross currency swap, the cross currency real rate swap and the cross currency inflation swap.
For more information, see Customizing the Cross Currency Basis Swap Curve .
See the spreads as a mid value or a bid/ask value using the B/A <> Mid toggle button.
Change the rate used for any given tenor.
Accept the rates displayed in the page for use in this session by clicking the Accept button.
Display the real-time market rates by clicking the Refresh button.
Save a basis swap curve. See Saving a Basis Swap Curve.
Access a saved basis swap curve. See Opening a Saved BMA Curve.
Send a saved basis swap curve to a contact. See Sending a BMA Curve to a Contact.