Interpreting Receive-Basis Positions in Cross-Currency Swaps

Summary

The document clarifies how to interpret receiving the basis in a cross-currency basis swap when the basis is quoted on the non-US-dollar leg. It gives a negative JPY/USD basis example: the party borrowing yen pays yen Libor minus the quoted spread and receives dollar Libor, while the party borrowing dollars pays dollar Libor and receives yen Libor minus the spread.

This convention means the basis is attached to the non-dollar interest leg, so identifying who receives or pays it requires tracking both the borrowed currency and the cash flows exchanged. A deeply negative basis is described as indicating strong demand for dollar funding: a participant seeking dollars accepts less interest on its non-dollar lending leg. The example provides a directional interpretation, not a full treatment of swap pricing, collateral, tenor conventions, or changes in benchmark rates. The key practical lesson is to read the quote convention and both legs before labeling a position as receiving or paying basis.

Key ideas

• Cross-currency swap basis is quoted on the non-dollar leg in the convention described.
• A negative basis reduces the interest paid on that non-dollar leg relative to its reference rate.
• A dollar borrower pays dollar Libor and receives the non-dollar reference rate adjusted by the basis.
• A deeply negative basis can indicate strong demand for dollar funding.
• Determine whether a party receives or pays basis by tracing the swap’s currency cash flows.

Tags

# Currency swap terminology


# Currency swap terminology












With reference to cross currency swaps, what does it mean to receive the basis?

"Demand from Japanese institutions to receive basis (USD funding) increased due to emergency dollar demand due to the financial crisis"

I understand basis is negative for most currencies vs. USD. So dollar lender in the swap pays less interest to its counterparty(as the basis is negative). So if I borrow USD, am I receiving or paying the basis?

## Answer by user42108 (score 1)

https://quant.stackexchange.com/a/61540

From a sellside primer on CCBS: "The basis is quoted on the non-USD leg. For instance, if a 10y JPYUSD x-ccy basis swap is quoted -65bp, it means the borrower of JPY funds will pay JPY Libor -65bp every three months in exchange for receiving USD Libor flat from its USD loan. Inversely, the borrower of USD funds will pay USD Libor flat in exchange for receiving JPY Libor -65bp from its JPY loan. A deeply negative basis (-65bp in the above example) therefore suggests an exacerbated demand for US dollars, as one party is willing to receive much less interest rates on its non-USD loan"

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.