Cross-currency curve construction sometimes produces a counter-intuitive result: two curves that each appear well-behaved in isolation, smooth, consistent with their underlying market data, can produce a spread between them that exhibits material noise. Without careful attention to spread modelling, it is possible to build two technically correct curves that imply a materially incorrect spread. This will translate as artificial variance and erode portfolio performance, reflecting modelling choices rather than any underlying market risk.
At Coremont, we worked closely with our clients to focus on the areas of the curves they trade most actively. From that collaboration, we developed and deployed an alternative approach: stacked curve construction.
The methodology departs from fitting two independent curves and computing their difference. Instead, the second curve is constructed as an interpolator calibrated directly on top of the first, so that the spread is itself a single interpolator rather than the difference of two. The spread therefore inherits smoothness by construction. The same architecture extends recursively, supporting further layered interpolators on top of established curves.
We implemented EUR ESTR as the base curve for the EUR XCCY curve, with pillars aligned to ECB meeting dates, the points at which EUR rates step. The same methodology has subsequently been applied to JPY, AUD, and CAD, producing measurable improvements in spread smoothness across cross-currency portfolios.
The chart below illustrates the practical effect. Under stacked construction, four EUR/USD 3M cross-currency basis spreads, with start dates between Jun 2027 and Mar 2028, cluster tightly across every valuation date, moving consistently as a group. Under unstacked construction, the same four instruments span nearly four times the range, with no underlying market basis for the divergence. The dispersion is artificial, introduced by fitting curves independently rather than reflecting any genuine difference in cross-currency basis risk.
This methodology is built directly into Clarion, Coremont’s portfolio management and risk analytics platform, giving institutional clients robust cross-currency spreads without the artificial variance that independent curve fitting introduces.
