Reply To: Separate FX Conversion and Discounting

Tom Graham

If the deal is EUR, and you have both EUR and USD base reporting currencies –

In the first case – the deal should be booked with EURIBOR.EUR standard discounting curve.

-In your USD reporting scenario, you map EURIBOR.EUR to your synthetic “DF_FX_USD.EUR” discounting curve.
-In your EUR reporting scenario you apply no mapping.

In the EUR reporting scenario – the value of the deal is the EUR payment discounted by EURIBOR.EUR as normal.

In the USD scenario – the ‘non-base’ (EUR) value of the deal is now the EUR payment discounted by the synthetic EUR discounting curve, which as you say is a different value, but you can hopefully get away with not needing this value: I.e. you are not interested in looking at the EUR value of the EUR deal in the USD reporting scenario.

What matters is that you get the base (USD) value as the EUR payment, converted to USD at the forward FX rate, then discounted by LIBOR.USD.

That is what I meant above – why you need to create different mappings using different sets of synthetic curves for each reporting currency scenario.

There are some cases where applying the mapping actually fundamentally changes the underlying deal value – 0/1 spread deals with currency conversion are a nice case I have found – but anything which is simple discounting valuation should be OK.

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