We provide a general HJM framework for forward contracts written on abstract market indices with arbitrary fixing and payment adjustments. We allow for indices on any asset class, featuring collateralization in arbitrary currency denominations. The framework is pivotal for describing portfolios of interest rate products which are denominated in multiple currencies. The benchmark transition has created significant discrepancies among the market conventions of different currency areas: our framework simultaneously covers forward-looking risky IBOR rates, such as EURIBOR, and backward-looking rates based on overnight rates, such as SOFR. In view of this, we provide a thorough study of cross-currency markets in the presence of collateral, where the cash flows of the contract and the margin account can be denominated in arbitrary combinations of currencies. We finally consider cross-currency swap contracts as an example of a contract simultaneously depending on all the risk factors that we describe within our framework.

Cross-Currency Heath-Jarrow-Morton Framework in the Multiple-Curve Setting

Alessandro Gnoatto
;
Silvia Lavagnini
2023-01-01

Abstract

We provide a general HJM framework for forward contracts written on abstract market indices with arbitrary fixing and payment adjustments. We allow for indices on any asset class, featuring collateralization in arbitrary currency denominations. The framework is pivotal for describing portfolios of interest rate products which are denominated in multiple currencies. The benchmark transition has created significant discrepancies among the market conventions of different currency areas: our framework simultaneously covers forward-looking risky IBOR rates, such as EURIBOR, and backward-looking rates based on overnight rates, such as SOFR. In view of this, we provide a thorough study of cross-currency markets in the presence of collateral, where the cash flows of the contract and the margin account can be denominated in arbitrary combinations of currencies. We finally consider cross-currency swap contracts as an example of a contract simultaneously depending on all the risk factors that we describe within our framework.
2023
HJM, FX, cross-currency basis, multiple curves, benchmark transition, SOFR, collateral
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11562/1116008
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