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Soft Currency OIS Discounting (Part VI)

Posted: 4 Nov 2013 Last revised: 30 Apr 2015

Vilimir Yordanov

Independent

Date Written: April 15, 2015

Abstract

The OIS discounting becomes a benchmark in the post-crisis pricing of OTC derivatives. If more or less the major theoretical difficulties with the new concept are solved, there still remain some. An example for such is the very common situation when the collateral is denominated in a soft currency. It has not only a theoretical significance but also has a very practical one. This is due to the fact that many financial institutions with a focus on emerging markets possess assets denominated in soft currencies and it could be beneficial for them to pose or accept such as collateral. Moreover, sometimes this could be the only viable option in a situation when they are a local entity and trade predominantly in a local currency. A manifestation for all these is the fact that some major emerging markets countries in the recent years have developed markets for local currency OIS swaps and there are liquid quotes available. The paper considers these questions and builds a framework for a soft currency OIS discounting.

Keywords: liquidity, crisis, counterparty risk, yield curve, forward curve, discount curve, pricing, hedging, exchange rate, credit risk, currency risk, collateral

JEL Classification: E43, G12, G13

Suggested Citation

Yordanov, Vilimir, Soft Currency OIS Discounting (Part VI) (April 15, 2015). Available at SSRN: https://ssrn.com/abstract=2349822

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