Reply To: Separate FX Conversion and Discounting

Gareth Evenson

Just a follow up on this. One of the key issues with using FX-MG-DIS is delta position. With FX-DIS they you see effectively 2 cash flows and a spot position – and you have libor delta on both sides. But with the FX-MG-DIS model then there is delta to the FX Fwd curve and the ccy2 libor curve. So this can have a significant impact on the overall interest rate delta position.

Also with the FX-MG-DIS model (following on from your point initially) the fx forward curve can be marked a long way from the arb (libor1/libor2) . Which is fine if you want this ability. But it can generate some strange P&L and you must be consistent in approach (unlike a certain Canary Wharf based Bank that I recently worked at).

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