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Questions tagged [libor]

LIBOR was the London Inter-Bank Offered Rate. It has been replaced by The SOFR (Secured Overnight Financing Rate).

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Rate interpolation in Libor Market Model

Libor Market Model (LMM) models the interest rate market by simulating a set of simply compounded, non-overlapping Libor rates which reset and mature on predefined dates. How do I obtain from them a ...
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15 votes
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For which instruments performs SABR/LMM better than LMM?

For which class of instruments the SABR/LIBOR Market Model does perform better than the classical LIBOR Market Model? The LIBOR Market Model The LIBOR Market Model — also known as Brace, Gatarek, ...
Tim Enghel's user avatar
10 votes
3 answers
3k views

Why is there a convexity adjustment if the payment date differs from Libor end date?

A 3 month LIBOR that fixing at $T$, paying in 3 months does not have a convexity adjustment. However, 3 month LIBOR fixing at $T$, paying in 6 months needs a convexity adjustment. How is this shown ...
user18092319239's user avatar
10 votes
3 answers
1k views

LIBOR Cessation: Construction of Term-RFRs as LIBOR Fallbacks; Forward vs. Backward Looking

This question emerged from comments in this feed: OIS rate to build Term structure. I was wondering how the float leg of an IRS will look like in a post-LIBOR world. Assume the following time-line, ...
KevinT's user avatar
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9 votes
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What is the market standard for IR option pricing when moving to SOFR

From books it looks like market standards to price IR options, like swaptions, are SABR, LMM or mix of the two (SABR-LMM). But LMM models the forward LIBOR rate. What will happen to it once LIBOR ...
Goo Gle's user avatar
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1 answer
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Where do swap rates and/or long-term forward rates come from?

I apologize if this is supposed to be obvious, but ... . Libor spot rates are quoted up to a year, beyond that one can use Eurodollar futures to continue to build the curve. Let's say up to 3 years. ...
PBD10017's user avatar
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8 votes
2 answers
1k views

Why is USD LIBOR used for USD denominated securities?

I am just starting on Interest Rate Swaps & curve construction. While reading few materials on Interest Rate Swap, it's indicated for e.g. "Floating Coupon Index: 6 month USD LIBOR". LIBOR is ...
bonCodigo's user avatar
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8 votes
2 answers
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Is SOFR to replace LIBOR or Fed Fund Rate or both

I am a bit confused on what is going on regarding the new benchmark rate SOFR. My understanding is that SOFR is to replace Libor. However, I also get information on Fed fund OIS discounting is ...
Peaceful's user avatar
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8 votes
3 answers
7k views

Why banks borrow from each other

I was reading on the topic, and would like to be sure that my understanding is correct. For the benchmark I would consider American banking system as I've mostly used sources such as FRS and Federal ...
SBF's user avatar
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8 votes
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Do you have a validation set for Libor Market Model implementation?

I'm trying to calibrate a Libor Market Model (LMM) in Matlab with my user-defined function, not their package. I already fitted the market volatilities using SABR but failed to simulate the ...
Tulio Carnelossi's user avatar
7 votes
3 answers
614 views

What does LIBOR really represent?

LIBOR - rate at which banks in LONDON would lend to each other. Is there a similar index for banks in New York (or any other major financial city) would lend to each other? For example, what is the ...
user26718's user avatar
7 votes
3 answers
13k views

Why would a 6M LIBOR rate be significantly above 3M LIBOR, ED futures and swap rates?

Just was just looking at the various interest rates and noticed this: ...
ikh's user avatar
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7 votes
1 answer
265 views

Why is the LMM with mixture dynamics (Brigo & Mercurio) inconsistent for the pricing of exotics?

I am reading about the LMM with lognormal-mixture dynamics. Consider the following dynamics for the forward rate $F_{i}(t)$ fixing at $T_{i-1}$ and paying at $T_i$: \begin{align} dF_{i}(t) = (F_i (t) +...
BEQuant's user avatar
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6 votes
2 answers
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Libor Market Model: numeraire change

I am currently studying the Libor forward market model, and although I get the mechanics behind the main arguments, I still do not have an intuitive idea of what's exactly the objective behind ...
Adam's user avatar
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1 answer
567 views

What can be used to replace the Libor - OIS indicator in assessing fear in money markets?

Libor is dead and used to be uncollateralised. Libor-OIS was a useful indicator to measure the spread between risk free (central bank e.g. Fed funds) rate and the interbank lending rate. For example ...
tweedi's user avatar
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450 views

Discount curve and payment frequency

In case of uncollateralised trades, where we use LIBOR rates for discounting, does the LIBOR tenor have to match with the payment frequency? For example, one of the swap leg pays USD floating amount ...
ssc5338's user avatar
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6 votes
1 answer
222 views

Seeming arbitrage in excess reserves

In the US banks are required to store 10% of their deposits in cash in the form of Fed Funds. Due to misbalance of demand and supply, some banks borrow such cash from others; the volume averaged ...
SBF's user avatar
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6 votes
2 answers
461 views

Why is the LIBOR-market model free of arbitrage?

Recently I have been reading a lot on the market models. One thing that keeps escaping me - why is the Libor-market model (LMM) assumed to e free of aritrage in continuous time ? To me this means ...
Quanti's user avatar
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6 votes
0 answers
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Swaptions on SONIA/SOFR/ESTR

Given that LIBOR is being decommissioned and we must start building liquidity in swaptions on the OIS swaps, how do we price them? i.e. If I have a swaption on SONIA/SOFR/ESTR etc how does the pricing ...
BrownianBread's user avatar
5 votes
3 answers
15k views

Is there an Australian Interbank Rate?

Most widely used Interbank Rates are LIBOR, EURIBOR. Then I read online on SIBOR (Singapore). It says Canda, US are following LIBOR as well. So for Australia, is there a dedicated interbank rate like ...
bonCodigo's user avatar
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5 votes
1 answer
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What is Dual Curve Bootstrapping? And how to do it, with an example?

I am starting to explore this area. My ultimate aim is to build a 3 month LIBOR forward curve. I wish to know what exactly 'Dual Curve Bootstrapping' is (If someone could explain it in clear words). ...
Mathematician Joe's user avatar
5 votes
3 answers
608 views

Curve building dates overlapping impact on discount factor

I'm building a short end of the libor curve using deposit & fra due to overlapping in dates I get wrong values of Discount factor, here's the data i'm working with: My today date is : 23/10/2019 ...
Gogo78's user avatar
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5 votes
1 answer
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Forward starting zero-coupon bonds

We trivially have that: $$\frac{Z(t_0,t_1)}{Z(t_0,t_2)}=1+\tau L(t_0,t_1,t_2)$$ Where $L(t_0,t_1,t_2)$ is the forward Libor between $t_1$ and $t_2$, as of $t_0$. Simply inverting this relationship ...
Jan Stuller's user avatar
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5 votes
1 answer
7k views

Dual Curve Bootstrapping - When to OIS discount?

I am a new quant and I am trying to understand some of the specifics of dual curve bootstrapping. For concreteness, suppose I want to build a Libor forward curve. From what I understand OIS ...
moquant's user avatar
  • 115
4 votes
1 answer
2k views

Risk-free: why LIBOR pre-crisis and OIS now

Quick question as a follow-up to this post: why was LIBOR used instead of OIS pre-2007 for the risk-free rate proxy? Please correct me if I am getting this mixed up, but from what I've seen, it ...
jake_r's user avatar
  • 223
4 votes
2 answers
475 views

Uncollateralised trades in Libor transition

Consider an OTC derivative traded with no CSA agreement, i.e. the trade is uncollateralised. My understanding is that a Libor swap curve is used in this case to discount the cashflows for this ...
BrownianBread's user avatar
4 votes
2 answers
4k views

Difference between OIS Rate and Risk-Free Rate

What exactly is the difference between the fixed rate of an OIS and the risk-free rate in that currency. For example, in the US the OIS rate vs. risk-free rate SOFR or in the UK the OIS rate vs. the ...
Nhat's user avatar
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1 answer
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Is there a difference between JPY TONA and JPY TONAR?

Wikipedia defines TONAR as "Tokyo Overnight Average Rate". The official Bank of Jappan website mentions TONA, rather than TONAR. I suspect the two, TONAR and TONA, are in fact two terms ...
Jan Stuller's user avatar
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4 votes
3 answers
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Change of measure between T-forward and T*-forward contract?

I am trying to prove the need of a convexity adjustment to a forward rate by calculating the next expectation: \begin{align*} P(t_0, T_s)E^{T_s}\big(L(T_s, T_s, T_e) \mid \mathcal{F}_{t_0}\big). \end{...
Aldo Shumway's user avatar
4 votes
1 answer
835 views

Accrued interest calculation for floaters linked to O/N rates (such as SOFR)

It is known that between 2021 and 2022, LIBOR rates will cease to exist. Therefore bond issuers started to link their newly issued floaters to O/N rates based on actual trades such as SOFR for USD or €...
Martin Vesely's user avatar
4 votes
1 answer
467 views

Annualised Sharpe Ratio for Index vs Index Benchmarking

I am currently writing a paper about the performance characteristics of alternative energy equity indexes and am therefore comparing them to their benchmark indexes (msci world, etc). To calculate the ...
deon's user avatar
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4 votes
1 answer
2k views

what is the definition of resetting tenor and time to maturity tenor in libor rates

I have a question about the definition and understanding of libor rates. We have the time to maturity tenor, $T$, which is the time over which i borrow or lend money. For libor we also have the reset ...
math's user avatar
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3 votes
2 answers
11k views

A libor curve VS A 3-month or 6-month libor curve

I'm very confused about the terms regarding libor curves in general. When people talk about libor curve, I picture it as a curve with different libor maturities (i.e. 1 week, 1 month, 3-month and 6-...
tg36's user avatar
  • 31
3 votes
1 answer
462 views

Is this an inconsistency between Swap and LIBOR?

I'm a little confused by what I see as an inconsistency between quoted £ swap rates and £ LIBOR. From the FT on 25/4/14: 1-year Swap (semi-annual): Bid - $0.63\%$; Ask - $0.66\%$ LIBOR: 6-month - $R_{...
ajc3's user avatar
  • 195
3 votes
3 answers
5k views

Basic LIBOR curve question

I'm new to the quant finance and have a very basic question about LIBOR curve. LIBOR is published every day for 4 different tenors (1M, 3M, 6M, 1Y), and each rate means how much annual interest ...
brian kim's user avatar
  • 141
3 votes
1 answer
795 views

3M curve vs 6M Curve, which one to use for valuation of IR Derivatrives

Sorry, this might be basic for some of you but I'm very confused when it comes to know which curve (6m or 3m) we can use for valuations of swaps and swaptions. Could someone please explain when to use ...
Gogo78's user avatar
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3 votes
2 answers
548 views

2 Ways to Define/Calculate "FVA"? - Same or Different? (Simple XVA Question)

I've got a very simple question on 2 different ways of defining or calculating the FVA of an uncollateralized swap. One definition I've often seen is that the FVA is the difference in the net present ...
Curiosity's user avatar
3 votes
1 answer
3k views

Why is Overnight LIBOR lower than BoE Base Rate?

According to this site, the current overnight GBP LIBOR is 0.45638%, and the Bank of England base rate is 0.5%. My understanding is that the overnight LIBOR should always be higher than the base rate,...
Samuel B's user avatar
3 votes
2 answers
986 views

6 month curve from 3 month forward rate agreements

Is it possible to bootstrap at least an approximate 6 month LIBOR curve (actually NIBOR, for Norway, in my case) if rates for 3 month FRAs are known? For example, say we know the rates for 1x4, 7x10, ...
Math's user avatar
  • 249
3 votes
2 answers
2k views

LIBOR rates from Vasicek/Hull-White model?

I am somehow puzzled by the following problem: LIBOR rates are forward rates for an interbank loan for 1M or 3M (let's limit the range of possibilities to these two cases). Assuming that I have ...
Bard's user avatar
  • 55
3 votes
2 answers
924 views

OIS rate to build Term structure

There are some discussions (e.g. Difference between OIS Rate and Fed Funds Rate) on usage of OIS rate to build the Libor term ...
Daniel's user avatar
  • 377
3 votes
1 answer
209 views

Can you shift a standard libor market model with regard to only at-the-money options?

Suppose I have an LMM defined using the spot measure as in Brigo and Mercurio: $dF_k(t) = \sigma_k(t)F_k(t)\sum^k_{j=\beta(t)}\frac{\tau_j\rho_{j,k}\sigma_j(t)F_j{t}}{1+\tau_jF_k(t)}dt + \sigma_k(t)...
JoeBass's user avatar
  • 103
3 votes
3 answers
445 views

Arbitrage on Libor and swap market

I must be wrong here, but still want to know where I am wrong. I found the data of Libor rate and swap rate from this link: http://www.interestrateswapstoday.com/libor-rates.html At the time, I read ...
kenneth's user avatar
  • 167
3 votes
3 answers
1k views

Spread over LIBOR on a Equity Swap

Does anyone how banks determine the spread over LIBOR on a Equity Swap? Example: Party A pays the return on SPTR to Party B Party B pays 1M LIBOR + 40 bps to Party A Does anyone know how the 40 ...
Boommer's user avatar
  • 31
3 votes
1 answer
271 views

Compare equity option volatility under SOFR vs LIBOR

We know that after the big bang from LIBOR to SOFR, LIBOR will eventually disappear. This brings up one question that I do not have a clue to answer: How to evaluate derivative in a consistent manner ...
user avatar
3 votes
1 answer
2k views

IMM Swaps - Accrual & Fixing Schedule

I am wondering how accrual periods & reset dates on Quarterly-IMM swaps are different to normal swaps (in terms of conventions). For example: Normal Swap: ...
Phil-ZXX's user avatar
  • 1,042
3 votes
1 answer
478 views

LIBOR with different tenor

Let $F(t;S,T)$ be the forward rate from $S$ to $T$ seen at time $t$, and $I$ be one of tenors, i.e. $I$ is one of {1M, 3M, 6M, 12M}. Then the forward curve $t\mapsto F(0;t,t+I)$ is $I$-forward curve. ...
brian kim's user avatar
  • 141
3 votes
0 answers
197 views

Libor transition to SOFR - swaps after 2021

Assuming that Libor will fully transition to SOFR by the end of 2021. How are swap rates after 2021 currently priced to reflect this? For example, if I am looking at 5 year US swap rate, doesn't this ...
decaybeta's user avatar
  • 101
3 votes
0 answers
250 views

Pricing eurodollar futures

How are Eurodollar futures priced in practice? What I already know: The implied 3 Months rate by the futures is 100-price, since it matches the payoff. Using daily LIBOR rates, one should be able to ...
Johny's user avatar
  • 31
3 votes
1 answer
621 views

Convexity adjustment when payment if after interest natural term?

I've been working with a convexity adjustment for an interest rate payoff and the next question came to me: The usual problem that gives rise to the convexity adjustment I'm referring to is as ...
Aldo Shumway's user avatar