“A common client request is whether its possible instead to have the methodology that does ( 1 ) Convert from CC1 to CC2 using Forward FX rates and then ( 2 ) Use LIBOR CC2 to discount this back.”
I have implemented this a few time, including here at BP.
“The closes it seems we can achieve this is to Construct the LIBOR curves using the Forward FX Rates. This however still is linking the two in Endur.”
But you are still effectively doing (1), then (2) as required, although indirectly – the system is still discounting using the LIBOR CC1 rate, but now using a LIBOR CC1 curve that is synthetic – derived from FX Forward plus the actual LIBOR CC2.
The fact that you are still not completely disconnecting discounting from FX conversion is moot – what matters is that mathematically – you are converting from payment currency to base currency at the forward FX rate given by the “outright” forward FX curve, and then discounting at the base currency Libor rate: This is exactly what you are doing when you use the synthetic derived deal currency discounting curve.
The pro’s of this solution are you get what you want: Also the standard Tran Gpt Delta sim result gives you exposure to the Forward FX rate, rather than discounting plus Spot.
The Con is some complex curve setup which has to be replicated for every combination of payment and base currency you have to deal with.
Interest rate swaps should still be booked against an actual Libor Curve, I guess – with synthetic derived curves only used in mappings in relevant sim results. Of course there is no longer a single LIBOR discounting curve per currency anyway, but that is a whole other subject.
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