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Generally it is best to use the rates that best capture how the collateral of the instruments are priced. If the overnight collateral on the instruments is managed using offshore JPY depo, then this would be a good choice.


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Risk-free rate is used to discount future values to today; but we use this rate to denote cost of capital (loosely speaking) i.e., you can borrow/lend at this rate. US Treasuries would be used if the entity whose securities were being valued enjoyed the same credit as the government. Since most banks can at best borrow at OIS/LIBOR; this becomes the rate ...


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i would guess the value of volatility that makes the variance swap with strike equal to it have zero value.



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