25 April 2022 12:22

FX Delta eines Cross Currency Basis Swaps

What is cross currency basis swap?

In a cross-currency swap, interest payments and principal in one currency are exchanged for principal and interest payments in a different currency. Interest payments are exchanged at fixed intervals during the life of the agreement.

What is the difference between FX swap and cross currency swap?

FX Swaps and Cross Currency Swaps

Technically, a cross-currency swap is the same as an FX swap, except the two parties also exchange interest payments on the loans during the life of the swap, as well as the principal amounts at the beginning and end. FX swaps can also involve interest payments, but not all do.

Is there FX risk in a cross currency swap?

Each party uses the repayment obligation to its counterparty as collateral and the amount of repayment is fixed at the FX forward rate as of the start of the contract. Thus, FX swaps can be viewed as FX risk-free collateralised borrowing/lending.

How do you price a cross currency basis swap?

To price a cross-currency basis swap, we need the FX forward rate, as well as forward projections of each floating rate to be exchanged out to the swap maturity. We calculate these forward rates (for EURIBOR and LIBOR in the EURUSD example below) from the nominal swap curve in each currency.

What does negative cross currency basis swap mean?

In general, the cross currency basis is a measure of dollar shortage in the market. The more negative the basis becomes, the more severe the shortage.

Why is cross currency basis negative?

Negative basis means that the Libor rate implied by the market FX swap rates is higher than the Libor rate in the interbank market. During the financial crisis, it became significantly more expensive to borrow dollars synthetically through the FX swap market than directly in the interbank market.

Why is AUD cross currency basis positive?

Typically, the basis spread in Australian dollar–US dollar cross-currency basis swaps is positive and is therefore paid by the counterparty making the regular Australian dollar payments, although this counterparty receives the basis spread on those occasions when it is negative.