Paper: Oct 11,2024
q-fin.MF
ID:2410.08477
Cross-Currency Basis Swaps Referencing Backward-Looking Rates
The financial industry has undergone a significant transition from the London
Interbank Offered Rate (LIBOR) to Risk Free Rates (RFR) such as, e.g., the
Secured Overnight Financing Rate (SOFR) in the U.S. and the AUD Overnight Index
Average (AONIA) in Australia, as the primary benchmark rate for borrowing
costs. The paper examines the pricing and hedging method for SOFR-related
financial products in a cross-currency context with the special emphasis on the
Compound SOFR vs Average AONIA cross-currency basis swaps. While the SOFR and
AONIA serve as a particular case of a cross-currency basis swap (CCBS), the
approach developed is able to handle backward-looking term rates for any two
currencies. We give explicit pricing and hedging results for collateralized
cross-currency basis swaps using interest rate and currency futures contracts
as hedging tools within an arbitrage-free multi-curve setting.
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Paper Author: Yining Ding,Ruyi Liu,Marek Rutkowski
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