Marking to Market a Cross Currency Swap - Components of NPV MTM
Hello - so I'm not a big math guy and don't really have a derivatives background but I've been asked by the boss to break down why the swap we have on is losing so much money, or rather why the NPV is so negative (bespoke trade with a BB derivatives desk counterparty). Ideally he wants a breakdown of how much $ value decline is due to change in interest rates, how much $ value decline is due to change in FX/basis swap rates? how much $ value decline is due to other components?I'm not really sure if there's a way to think about this properly. I've done some learning and see that a fixed to fixed CCX is basically an interest rate swap + basis swap + interest rate swap in foreign currency. But beyond that as soon as the libor curve shifts, I have no idea how that alone impacts the NPV in a vaccuum. Is it even possible to break this NPV change out by component? Or is there too much interplay between the components (like simple example is if revenue goes from $100 to $200, because price increased from 10 to 40 but quantity decreased from 10 to 5, there's no real way to outline how much of the revenue increase was due to the change in price vs. the change in quantity).
Any help here from swaps traders/sales would be much appreciated on how to think about these components and calc them out!
Bump!
Bump
Bump because this is interesting
This is way too complicated to explain in a post. I would set up a call with the counterparty asking if they could help you cuff this. Also ask for an unwind fee to see if it matches your NPV.
My guess is that if it is a float float swap, then it's unlikely to be interest rate driven since there is little duration (and more likely to be basis driven), and since frontend rates have been quiet the past several months.
Also check your accounting system, it's possible that the trade was set up in a way to have positive accruals, but now has a negative npv of future cashflows as an offset (without market moves having a material net impact). If your npv varies from the dealer unwind fee then this might be it.
If you want, post the two currencies, direction, notional, pnl, tenor, and rough date it was done and I can see if I can roughly cuff it for you. Change the notional and pnl both by factor of 2x or 10x or something if you want.
I think what he is asking you to do is calculate the NPV using the factors he given (if you have notes of what he actually said that would be better). So basically you take the interest rate swap, basis swap etc. and rank them from which one comes first and then calculate your NPV with the plug ins of those values in ranking orders. Feel free to dm me if you want to ask more. And also the LIBOR curve is just the benchmark so if it moves. Expect a variance of movements with the other rates as well. (Best choice here is to make an Excel calculator and reference/tie stuff to each other so it is easier to visualise.
Given you example. You are giving the revenue increase of $100 because the price of the product? Was x4 but quantity is declined by half. So by price change it would be the % of the price change (200%) and the change in quantity is (-50%).
Ex iusto nam mollitia libero dignissimos sed. Earum consequuntur quia eveniet suscipit. Necessitatibus sunt omnis laboriosam non aliquid recusandae est qui. Sint alias pariatur quia rem.
Aut expedita adipisci eos praesentium. Velit necessitatibus perspiciatis nihil voluptas minima nesciunt. At architecto quaerat voluptas quidem nulla praesentium. Quia eligendi saepe autem alias fugit qui. Reiciendis sit nemo vel accusantium corrupti modi delectus aut. Ducimus dolore voluptatem sunt reprehenderit deleniti est.
Iure veritatis occaecati doloribus et non omnis. A provident rerum perferendis rerum. Rem id labore cumque consequatur sint harum dignissimos. Accusamus nihil consectetur incidunt quibusdam eligendi suscipit.
Dolorum blanditiis ducimus similique. Doloremque id a sit rerum voluptatem magnam voluptate. Temporibus eos voluptatem quia quod. Enim et asperiores sequi velit.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...