Settlement Currency and CSA Effects in Derivative Valuation

Summary

This question asks whether otherwise identical derivative payoffs should have the same value when paid in different currencies, given a fixed USD SOFR collateral agreement. It compares a fixed sterling payment with payments converted at the future GBP/USD or GBP/EUR spot rate. The issue is whether settlement currency itself changes valuation when collateral currency is specified.

The author conjectures that the three contracts should be equivalent and suggests that settlement choice could matter when the collateral agreement allows a choice of eligible currency, described as a cheapest-to-deliver arrangement. However, the document contains no answer, derivation, or market evidence, so it does not establish that the payoffs are economically identical. In particular, currency conversion mechanics and the precise payoff definition would need to be considered in a full valuation. This exchange identifies a pricing question rather than supplying a settled method or conclusion.

Key ideas

• The question compares sterling cash settlement with payoffs converted into dollars or euros at a future spot rate.
• It holds the collateral agreement fixed in USD SOFR while varying settlement currency.
• The author conjectures equal values under a fixed-currency CSA but offers no derivation or evidence.
• The exchange suggests that a CSA allowing collateral currency choice could affect valuation.

Tags

# when valuing derivatives, we take into account the CSA. question is, should settlement currency also impact?


# when valuing derivatives, we take into account the CSA. question is, should settlement currency also impact?












eg supposing i have a payoff of 100 GBP on 5/5/2025. and my CSA is USD SOFR.

and supposing i have another identical derivative, except it's payoff is 100 * GBPUSD spot (in USD) at 5/5/2025 or that its payoff is 100 * GBPEUR spot (in euros) at that date.

so the only difference between all 3 of these is the settlement currency. then should all these 3 have exactly the same value?

i am guessing the answer is yes. and the only scenario where the choice of settlement currency may have impact is if the CSA allowed choice of which currency to use - ie a CTD CSA.

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