Exploring Implications of Multi-Currency Collateral in Swap Pricing: KRW CD Transition to KOFR

The development of the KOFR OIS market would enable the adoption of the KOFR OIS rate as the KRW risk-free rate, which implies a transition in swap valuation discount curve from the existing KRW CD swap curve to the KOFR OIS curve. This research analyzed the implications of transitioning from KRW CD to KOFR as the reference rate and the impact of multi-currency collateral on swap valuation. Based on KRW swap portfolios, market values and risks have been measured using both dual-curve and single-curve methodologies for collateral denominated in KRW, USD, EUR, JPY and GBP, respectively. Empirical analysis has revealed that both par swap and off-market swap are exposed to risks associated with the OIS rate of the collateral currency and the swap basis. For off-market swap, KRW collateral resulted in the lowest market value, while JPY collateral yielded the highest market value. The findings highlighted that the transition to the KOFR and the use of multi-currency collateral in the domestic swap market introduce complexities in calculating swap fair value and risk. Accordingly, effective risk management requires a comprehensive understanding of these dynamics.