Cross Currency Swap Valuation
Lucht Probst Associates GmbH
Wolfgang M. Schmidt
Frankfurt School of Finance & Management Gemeinnützige GmbH
May 6, 2005
Cross currency swaps are powerful instruments to transfer assets or liabilities from one currency into another. The market charges for this a liquidity premium, the cross currency basis spread, which should be taken into account by the valuation methodology. We describe and compare two valuation methods for cross currency swaps which are based upon using two different discounting curves. The first method is very popular in practice but inconsistent with single currency swap valuation methods. The second method is consistent for all swap valuations but leads to mark-to-market values for single currency off market swaps, which can be quite different to standard valuation results.
Number of Pages in PDF File: 15
Keywords: interest rate swap, cross currency swap, basis spread
JEL Classification: G13
Date posted: April 9, 2009
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