Banks finance their operations in several ways, by shareholders equity, receiving deposits from customers and by borrowing from investors and other financial institutions. One widely used approach is to issue a bond. Bonds issued on the foreign capital markets is a way to increase the financing options and mitigate risk exposure. When a bank converts foreign capital to domestic capital, there is a degree of currency risk involved. One commonly used instrument for converting capital from one currency to another is a cross currency swap. Since the Global Financial Crisis 2007-2009 regulations imposed by regulators have increased. Banks are required to have sound risk management practises where risk exposure is estimated. In response to recent regulations banks have several departments which assess and follow up risks taken in the operations. As a result, at least two systems are used when valuing financial instruments, one where all trades are conducted, the front office system, and one where risk exposure is estimated, the risk system. The aim of this project is to investigate why there is a discrepancy between the two systems. We will also analyse how this discrepancy affects risk measures. By replicating the two systems’ valuation it is possible to distinguish why there is a discrep- ancy between the systems, regarding the valuation of cross currency basis swaps. When the replication is in place, risk measure calculations are conducted to enable analysis of the impact on risk measures. There are two main differences found between the two systems and how they value a cross currency basis swap: (i) how the underlying risk factors are used; and (ii) how an upcoming cash flow is settled. The effect of these discrepancies are that the risk system overestimate the risk exposure compared with the front office system. / Banker finansierar sin verksamhet på flera olika sätt, %har flera möjligheter att, t.ex. genom eget kapital, inlåning och upplåning från investerare och andra finansiella institutioner. Ett vanligt förfarande är att emittera en obligation, där obligationer emitterade på den utländska kapitalmarknaden är ett sätt att öka finansieringsalternativen och därmed minska riskexponeringen mot den inhemska marknaden. När en bank konverterar utländskt kapital till kapital i den nationella valutan, finns en viss valutarisk inblandad. Ett vanligt instrument för att växla kapital från en valuta till en annan är en valutaswappar. Allt sedan den Globala Finanskrisen 2007-2009 har regleringen från tillsynsmyndigheter ökat. Banker är skyldiga att ha sunda riskhanteringsstrategier för att uppskatta sin riskexponering. Till följd av nya regleverk har banker idag flera avdelningar vilka estimerar och följer upp risker som tas i verksamheten. Ett resultat av detta är att åtminstone två system används vid värdering av finansiella instrument, ett system där all handel utförs, och ett där riskexponeringen estimeras. Syftet med detta projekt är att undersöka eventuella skillnader i värderingen av valutabasisswappar och vidare analysera hur detta påverkar olika riskmått. Det verkar vara en diskrepans mellan de två systemen där finansiella instrument värderas, speciellt med avsende på valutabasisswappar. Genom att replikera de två systemens värdering är det möjligt att urskilja varför det finns en diskrepans. Replikering av de två systemen låg till grund för beräkningen av riskmått samt analysen av hur skillnaderna påverkar dessa. % Resultat De huvudsakliga skillnaderna mellan de två systemen avsenede värderingen av valutabasisswappar är: (i)hur de underliggande riskfaktorerna används, och (ii) hur nästkommande kassaflöde (kupong) bestäms. Effekten av dessa skillnader är att systemet där riskexponering estimeras övervärderar risken jämfört med om risken skulle estimerats i systemet där all handel utförs.

The global foreign exchange (FX) market is one of the world's largest financial markets and a significant part of this market concerns the trading of FX swaps. For banks and other financial institutions, it is of great interest to model these swaps as accurately as possible, as this could improve their risk management. Numerous methods exist for modeling FX swaps, but it is not always clear if one model is superior to another. The purpose of this thesis is therefore to analyze, evaluate and compare different models that represent the stochastic processes in the FX swap market. To accomplish this, the thesis employs the reality model evaluation methodology developed by \citet{Blom_fx_pdf}. With this methodology, likelihood values for an out-of-sample period can be determined for a model, thereby enabling a statistical comparison to ascertain which model more accurately reflects the true distribution. This thesis will compare two models for FX swap prices: an interest rate model and a PIP-model. The PIP-model is constructed by determining a multivariate distribution based on in-sample observations of pips. The likelihood values for the out-of-sample observations can therefore be determined directly. The interest rate model, on the other hand, will be implemented using Blomvall's reality model evaluation in order to determine the likelihood values. It is constructed by evaluating risk factors of the FX swaps, rather than historical pips. The risk factors evaluated in this thesis are forward curves, the spot price and spikes in the supply and demand curve at certain dates. The results show that the interest rate model better represents the true distribution of FX swaps compared to the PIP-model. The statistical test of the out-of-sample likelihood values shows that the probability of the interest rate model outperforming the PIP-model is approximately 100 \%. Additionally, the result suggests that an implementation of the interest rate model using a Student's t-distribution is more advantageous than using a normal distribution, a conclusion also supported by a statistical test. Moreover, the effectiveness of Blomvall's reality model evaluation in determining likelihood values is confirmed, thus enabling the statistical comparison of different models.