Building a Cross-Currency Swap Pricer from Basis and Curves
Summary
The document outlines two approaches to translating a funding spread from one currency and floating-rate basis into another. One approach builds a curve-based pricing framework: collect cross-currency swap terms, determine collateralization and whether the foreign-currency leg resets its notional, gather relevant interest-rate swap data, and construct domestic overnight-index curves. A key technical step is bootstrapping a discount curve for cash flows under the other currency's collateral convention. The example assumes EUR and USD and a particular collateral arrangement.
A second answer says that a quoted currency basis swap spread can directly translate between liabilities indexed to different benchmarks, with principal exchanges at the beginning and end producing the synthetic currency conversion. A further response mentions using a swap pricing interface to calculate the conversion. These methods rely on suitable market quotes and consistent conventions; the document does not provide a complete derivation, curve-building formulas, or coverage of all collateral and reset structures. Its guidance is therefore a starting outline rather than a full pricing specification.
Key ideas
- Cross-currency swap pricing depends on collateralization and any mark-to-market notional resets.
- A curve-based approach combines cross-currency basis quotes with interest-rate swap data in both currencies.
- Discounting cash flows under foreign-currency collateral may require bootstrapping a dedicated curve.
- Currency basis swap spreads can translate funding costs between different currencies and floating benchmarks.
- Principal exchanges at the start and end support the synthetic conversion of a liability.
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Full text
# How to build a cross currency swap pricer? # How to build a cross currency swap pricer? We're looking to build a pricer to convert a funding spread in a given currency over a specific funding basis e.g. 20 bps EUR 3m€ and convert it to a funding spread to a different currency with a different funding basis say USD 6m$L. We're in the process of sourcing market swap data including discount factors for EONIA, FedFund and LIBOR for different tenors. Looking for someone to help us with this, could even turn into a paid project, basically I'm totally lost! Thanks! ## Answer by Bozothegrey (score 5) https://quant.stackexchange.com/a/28255 I recenlty worked on a similar problem and solved it with the help of Quantlib library. Assuming you are working with EUR and USD: - get cross currency (xccy) swap data EUR / USD. You want to know how the xccy is collateralized and if Mark-to-Market resets apply to the USD leg. - get interest rates swaps fixed vs ois / 3m / 6m in EUR and USD - build USD/FedFunds and EUR/Eonia models in Quantlib - [here is the difficult part] boostrap a discounting curve for EUR cashflows under USD/Fedfund collateral (this is not implemented in Quantlib) [*] Now you have a model that allows you to solve your problem, i.e. price any kind of cross currency swap between EUR and USD [*] assuming that the swap you want to price is under USD/FedFunds collateralization ## Answer by dm63 (score 2) https://quant.stackexchange.com/a/26271 You don't need all the discount factors. You just need the currency basis swap market, which exists precisely for this purpose. For example if the 5 yr eur/usd currency basis is -25, it means that you can exchange a euribor-25 liability for a usd libor flat liability. These swaps also have an exchange of principal amounts at the start and end to convert the debt synthetically from euro to dollars. So your eur+20 liability would become a usdlibor+ 45 liability in dollars. ## Answer by netbbq (score -2) https://quant.stackexchange.com/a/41890 If you have access to Bloomberg, using SWPM, you can calculate the result simply with a cross currency basis swap.
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