Configuring Cross-Currency Swaps - is it USDCAD or CADUSD?#
A Cross-Currency Swap (XCS) is composed of two
Legs. Each leg is a different currency and in some cases it does not matter
which currency in the pair one assigns to which Leg.
However, for some kinds of XCS and for some features it does matter.
Mark-to-Market Swaps#
MTM-XCSs are the default interbank XCS instrument. These Instruments have a single Leg whose notional is variable and is defined by future FX fixings. In rateslib only Leg2 can be defined as a MTM Leg. So whichever currency has the variable notional, and in general it is the dominant currency, e.g. USD or EUR where USD is not present, must be assigned to Leg2.
Thus, irrespective of how one refers to a USDCAD or CADUSD XCS, if the variable notional leg is USD this instrument should be constructed as a CADUSD instrument in rateslib.
Defining leg2_notional#
leg2_notional cannot be specified directly for a XCS,
instead it is implicitly calculated from notional (on leg1) and fx_fixings.
For mid-market pricing, if fx_fixings is not initially given, these will be calculated
dynamically from an FXForwards object (as well as future FX fixings
for MTM legs).
If you were to trade a USDCAD MTM-XCS in US$100mm with an initial FX fixing of USDCAD 1.35
implying a CA$ 135mm notional, this should not be entered as specified here. Instead it should
be entered as a CADUSD MTM-XCS (with MTM Leg in USD) specified by a notional of 135mm and
an initial fx_fixings of 0.74074 (=1/1.35).
In [1]: xcs = XCS(
...: effective=dt(2000,1,1),
...: termination="1y",
...: frequency="q",
...: notional=135e6,
...: fx_fixings=0.7407407407407407,
...: currency="cad",
...: leg2_currency="usd",
...: )
...:
To see the cashflows of a XCS curves and fx are always required. Here we just use
place holders to get a feel for the structure of this Instrument.
In [2]: xcs.cashflows(
...: curves=Curve({dt(2000, 1, 1): 1.0, dt(2002, 1, 1): 1.0}),
...: fx=1.0, # this value is not used an raises a UserWarning
...: )
...:
Out[2]:
Type Period Ccy Payment Notional DF Rate Cashflow NPV FX Rate NPV Ccy Collateral Acc Start Acc End Convention DCF Spread
leg1 0 Cashflow Exchange CAD 2000-01-01 -135000000.00 1.00 NaN 135000000.00 135000000.00 1.00 135000000.00 None NaT NaT NaN NaN NaN
1 FloatPeriod Regular CAD 2000-04-03 135000000.00 1.00 0.00 -0.00 -0.00 1.00 -0.00 None 2000-01-01 2000-04-01 ACT365F 0.25 0.00
2 FloatPeriod Regular CAD 2000-07-03 135000000.00 1.00 0.00 -0.00 -0.00 1.00 -0.00 None 2000-04-01 2000-07-01 ACT365F 0.25 0.00
3 FloatPeriod Regular CAD 2000-10-03 135000000.00 1.00 0.00 -0.00 -0.00 1.00 -0.00 None 2000-07-01 2000-10-01 ACT365F 0.25 0.00
4 FloatPeriod Regular CAD 2001-01-03 135000000.00 1.00 0.00 -0.00 -0.00 1.00 -0.00 None 2000-10-01 2001-01-01 ACT365F 0.25 0.00
5 Cashflow Exchange CAD 2001-01-01 135000000.00 1.00 NaN -135000000.00 -135000000.00 1.00 -135000000.00 None NaT NaT NaN NaN NaN
leg2 0 Cashflow Exchange USD 2000-01-01 100000000.00 1.00 0.74 -100000000.00 -100000000.00 1.00 -100000000.00 None NaT NaT NaN NaN NaN
1 FloatPeriod Regular USD 2000-04-03 -100000000.00 1.00 0.00 0.00 0.00 1.00 0.00 None 2000-01-01 2000-04-01 ACT365F 0.25 0.00
2 Cashflow Mtm USD 2000-04-01 0.00 1.00 0.74 -0.00 -0.00 1.00 -0.00 None NaT NaT NaN NaN NaN
3 FloatPeriod Regular USD 2000-07-03 -100000000.00 1.00 0.00 0.00 0.00 1.00 0.00 None 2000-04-01 2000-07-01 ACT365F 0.25 0.00
4 Cashflow Mtm USD 2000-07-01 0.00 1.00 0.74 -0.00 -0.00 1.00 -0.00 None NaT NaT NaN NaN NaN
5 FloatPeriod Regular USD 2000-10-03 -100000000.00 1.00 0.00 0.00 0.00 1.00 0.00 None 2000-07-01 2000-10-01 ACT365F 0.25 0.00
6 Cashflow Mtm USD 2000-10-01 0.00 1.00 0.74 -0.00 -0.00 1.00 -0.00 None NaT NaT NaN NaN NaN
7 FloatPeriod Regular USD 2001-01-03 -100000000.00 1.00 0.00 0.00 0.00 1.00 0.00 None 2000-10-01 2001-01-01 ACT365F 0.25 0.00
8 Cashflow Exchange USD 2001-01-01 -100000000.00 1.00 0.74 100000000.00 100000000.00 1.00 100000000.00 None NaT NaT NaN NaN NaN
Calculating the rate#
The XCS.rate method can calculate the implied rate for
any kind of XCS, whether it is parameterised as Float/Float, Fixed/Float, Float/Fixed, Fixed/Fixed
and MTM or non-MTM. By default it will calculate the spread on Leg1 which is traditionally
where the basis-point spread is assigned (to the non-MTM Leg). For a CADUSD XCS this
would align with market standard quotations.