ImplSrcFltTgtFxd
Subtype of MethodRather than using the given market currency basis swaps directly, construct synthetic currency swaps of the floating vs fixed type, i.e. swaps that exchange a SRC interest rate index against a TGT fixed rate R.
Web blog example here
The fair fixed rates on the synthetic swaps are found by realizing that the TGT floating legs in the currency basis swaps are - almost - also present in the TGT vanila swap market.
Concretely, for a given tenor a synthetic swap can be constructed by combining the two swaps below:
Swap 1: Receive floating SRC index vs paying floating TGT index, with an additional optional spread added to either the SRC (case a) or TGT (case b) index.
Swap 2: Receive floating TGT index vs paying fixed TGT rate R.
The result is:
Synthetic Swap: Receive floating SRC index vs paying fixed TGT rate R, with the additional optional spread added to either the SRC index (case a) or the fixed TGT rate (case b).
The advantage of this synthetic swap is that it does not involve the floating TGT index and therefore its price does not depend on the (unknown) forecasting TGT curve.
The only unknown involved in the price of the synthetic swap is the TGT discounting curve, which may then be produced by a simple bootstrapping procedure.