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Converting a USD Loan Spread into GBP with a Cross-Currency Swap

Article Quant Q&A · Author: user6400996
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Summary

The document asks how a UK investor can express the spread on a US dollar bank loan in sterling terms. The example is a five-year loan paying three-month USD LIBOR plus 100 basis points, with the desired result stated as three-month GBP LIBOR plus an equivalent margin.

The response frames the conversion as finding the GBP margin on a constant-notional cross-currency swap: the sterling LIBOR leg is exchanged against a dollar LIBOR leg that includes the loan’s 100-basis-point spread. It suggests using a Bloomberg swap-pricing screen to calculate the margin. No market data, worked calculation, or resulting GBP spread is provided, so the note identifies the instrument and setup but does not establish a numerical conversion. The answer also leaves unstated how specific loan features or current cross-currency basis quotes affect the calculation.

Key ideas

  • A USD floating-rate loan spread can be translated into a GBP floating-rate margin using a cross-currency swap framework.
  • The proposed setup compares a GBP LIBOR leg with a USD LIBOR leg carrying the loan spread.
  • The response suggests calculating the GBP margin for a five-year constant-notional swap.
  • No numerical result or market inputs are supplied.

Tags

Fixed incomeForexDerivatives pricing
Full text
# £ converted spread


# £ converted spread












I've been looking at US bank loans and would like to convert the spread that has been quoted to another currency. And I'm not quite sure how this can be done.

Say I'm a £ investor and have invested in a 5yr us bank loan paying '3 month $ libor + 100bps'. I'd like to convert this to its equivalent in £ terms. So to get '3 month £ libor + Xbps'

I'd like to figure out what X would be in this case.

I've been told that I would need a cross currency basis swap curve.

I'm just not sure - would anyone be able to help please?

## Answer by Antoine Conze (score 1)

https://quant.stackexchange.com/a/34455

You need to compute the GBP leg margin $x$ for a 5Y constant notional cross currency swap that pays GBP Libor + $x$ vs USD Libor + 100 bps. If you have access to Bloomberg you can use the SWPM page to do that.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.