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Single-Curve and Multi-Curve Pricing in USDINR Swaps

Article Quant Q&A · Author: Dijo John
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Summary

The document raises a pricing question about USDINR swaps: Indian banks are described as using a Modified MIFOR curve, based on SOFR and forwards, both to project INR cashflows and to discount them. International banks are described as using separate curves in a multi-curve model. The author asks how this modeling choice can create an arbitrage opportunity and how to quantify it.

The document also reports an observed quoting pattern: single-curve banks appear more competitive when quoting INR-for-USD swaps, while multi-curve banks appear to quote better rates for USD-for-INR swaps. It does not explain the direction of this difference, provide valuation equations, or show market data. As a result, it is best read as a question identifying a potential source of valuation and quote differences; establishing whether the differences represent arbitrage would require consistent assumptions about curves, cashflows, collateral, and market prices.

Key ideas

  • The document contrasts single-curve and multi-curve approaches to pricing USDINR swaps.
  • It describes Modified MIFOR as serving both cashflow projection and discounting in one approach.
  • It reports different apparent quote competitiveness depending on the swap direction.
  • It does not provide a method or evidence for quantifying arbitrage.

Tags

ForexFixed incomeArbitrageDerivatives pricing
Full text
# Model Arbitrage: Modified MIFOR vs SOFR


# Model Arbitrage: Modified MIFOR vs SOFR












For USDINR swaps, Indian banks use Modified MIFOR (SOFR +Fwd) curve as both the forward curve for determining INR cashflows as well as the discount curve while most international banks use a multi curve model. How does this lead to model arbitrage and how can this be quantified?

Edit - So I have observed that this difference in a single curve vs multi curve approach leads to banks using a single curve being more competitive while quoting INR to USD swaps while the multi curve using Banks quote better rates for USD to INR swaps. I don't understand why this difference arises.

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