Collateral Discounting and CTD Curves

As far as we can see there seems to be an agreement for discounting cash-flows in currency CY1, collateralized in currency CY2, using the CY1 cross-currency curves with basis CY1/CY2. This is simple enough when the CSA only allows CY2 as posting currency, but when several currencies are eligible with an option to choose, this should affect the discounting methodology. We have seen the Cheapest-To-Deliver (CTD) curves method in several software, where a blended curve is constructed from the optimal forward rates of the relevant cross-currency curves.

We do not know, however, how widespread this methodology is, and what companies are doing when the CSA is not only allowing cash but also securities such as bonds, possibly in several currencies. Furthermore, some CSAs appear to have posting conditions depending on the credit quality, which makes things even more complex.

We’d be interested to hear any experiences and opinions on the methodologies employed out there for the CSA types above.


Posted in: Valuation Models

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