CSA Discounting and Collateral Valuation in Cross-Currency Swaps

Summary

The document asks how to value collateral posted or received for a cross-currency swap when the credit support annex permits collateral in a currency different from the swap’s native currency. It distinguishes the CSA-adjusted discount factors used to value the swap from native-currency discount factors that might be used to value the collateral itself.

The question proposes that collateral in another currency may be less valuable because it must be converted through an FX swap, and asks whether this adjustment should be reflected in swap valuation but omitted when calculating the actual collateral amount. No answer or resolution is included, so the proposed interpretation remains unverified. The material is useful as a framing of the valuation issue, but it does not explain the relevant collateral mechanics, derive a pricing relationship, or supply numerical examples. Readers would need further sources to determine how the CSA terms, collateral currency, and conversion trades affect the amount called or delivered.

Key ideas

• Cross-currency swap valuation can depend on the collateral currency specified by the CSA.
• The question distinguishes CSA-adjusted swap discounting from discounting the collateral amount in its native currency.
• It suggests that converting collateral through an FX swap may affect its economic value.
• The document offers no answer, derivation, or worked example to validate the proposed treatment.

Tags

# Cross-currency Swaps - discounting used for calculating collateral posting in different currencies


# Cross-currency Swaps - discounting used for calculating collateral posting in different currencies












When finding the value of a cross currency swap you need to take into account the collateral posting currency of the CSA agreement and adjust the discount factors accordingly, see this reference for example going through the rationale https://insights.londonfs.com/modern-derivatives-pricing-csa-discounting.

My question is: When you're calculating the value of the actual collateral to be posted, would you still use the native currency discount factors or is the collateral posted the same as the present value of the swap, found using the CSA-adjusted discount factors?

It would seem to me that the CSA-adjustments are there to account for the fact that the collateral received is worth less to us if it is in the wrong currency, since we need to then enter into an FX swap to convert it, thus lowering the value of the swap. Then it would make sense that the actual collateral we receive should be unadjusted, and then when we enter into the FX swap we are left with the adjusted value. Meaning that the collateral should then simply be discounted with the native currency, not accounting for the CSA. Is this correct or am I thinking about it the wrong way?

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