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Former Member
Mar 23, 2012 at 02:13 AM

Cross Currency Swap and Dual Curve Stripping



We have recently created a EUR/USD cross currency swap in the CFM module under OTC derivatives. The valuation of this instrument is undertaken by discounting the future cash flows of each one of the legs. To to this the system uses the yield curve assigned in the valuation in both currencies USD and EUR. We are able to value it at month end without a problem using TPM60.

However, we have also performed the valuation on our Bloomber terminal. Bloomberg uses a more complex valuation algorithm. They use a process called dual curve stripping. This process takes the standard euro yield curve (bloomberg curve 201) and combines it with the euro swap baisis curve (curve 92) by re-bootstrapping it. The results of valuing the swap with the SAP curve and the Bloomberg curve are substantially different.

Bloomberg starting doing this because of the volatility experienced in the money markets as a result of the 2008 financial crisis. It seems that other institutions are also doing it as our counter party's valuation agrees to that of Bloomberg.

Until SAP provides a solution our approach will be to use the Bloomberg valuation to update the NPV table directly without running TPM60.

I was wondering if anybody else ran into this issue and how they are dealing with it.