13
votes
Risk-free: why LIBOR pre-crisis and OIS now
It comes down to the definition of LIBOR: London Interbank Offer Rate -> Every business day, a panel of large banks are asked by the BBA[*] (British Bankers Association) at what rate they would lend ...
- 527
10
votes
Why is there a convexity adjustment if the payment date differs from Libor end date?
Let us denote $\delta$, the Libor's tenor (e.g. 3M), $P(t, T)$ the price of a zero coupon bond price paying 1 unit of currency at $T$, and $L_t(T, T + \delta)$ the forward 3M Libor starting at $T$ and ...
- 2,240
10
votes
Accepted
Is SOFR to replace LIBOR or Fed Fund Rate or both
The market is using SOFR discounting for all sorts of quotations already (not FF). For example, swaption vol is quoted with SOFR discounting, CME and LCH moved to SOFR PAI and discounting on Oct. 16 ...
- 9,419
8
votes
Accepted
What is the market standard for IR option pricing when moving to SOFR
The industry will continue to use SABR and LMM, although in slightly modified versions. You may want to check the following papers to see how the extended model dynamics look like: SABR smiles for RFR ...
- 853
7
votes
Accepted
What is Dual Curve Bootstrapping? And how to do it, with an example?
A multi-curve means that you observe the discounting instruments (such as fed funds) and projection (libor, swap curve) and solve for all of them simultaneously; as opposed to bootstrapping separately ...
- 12.7k
6
votes
Discount curve and payment frequency
Better yet, don't use LIBOR for discounting at all.
Since LIBOR involves credit spread over the risk free rate, using LIBOR for discounting would adjust the deal's market value to reflect some amount ...
- 61
6
votes
A libor curve VS A 3-month or 6-month libor curve
A 3 month libor curve is a set of forward rates for 3 month libor. Thus, the curve begins at where 3 month libor is today , and takes different values for each possible forward observation date. ...
- 17.5k
6
votes
Can you model the LIBOR rate as a geometric Brownian motion?
It is not reasonable because rates display a stationarity but brownian motion is not stationary.
The variance of libor at a future time $t>0$ conditional on the value at time $t=0$ does not scale ...
- 2,197
6
votes
Accepted
3M curve vs 6M Curve, which one to use for valuation of IR Derivatrives
You use the curve that describes the floating rate index to estimate the floating rate cashflows, a swap against floating 3M uses a 3M curve to forecast the cashflows.
And then you use a discounting ...
- 11.2k
6
votes
Accepted
What can be used to replace the Libor - OIS indicator in assessing fear in money markets?
At this point most Libors are dead but not all. USD Libor goes away in June 23 so you have some time there. Also, Euribor lives on in a reformed state so you can continue to look at the Euribor- ...
- 17.5k
5
votes
Why change numeraire for the LIBOR Market Model
the point of the LMM is to evolve several different rates simultaneously. If you have rates $f_i$ from $t_i$ to $t_{i+1}$ and take a bond expiring at $t_j$ as numeraire then only the rate $f_{j-1}$ is ...
- 6,993
5
votes
Exploding Libor Rates in Libor Market Model
this is a well-known problem. One solution is to make volatility zero when rates exceed a certain high level.
It's less problematic than it looks because any cash-flows generated will be divided by ...
- 6,993
5
votes
What does LIBOR really represent?
Good questions! Libor is indeed specific to London, Tibor is specific to Tokyo. In New York banks lend to each other overnight in the Federal Funds market (confusingly, the Fed is not a counterparty ...
- 17.5k
5
votes
Why is there a convexity adjustment if the payment date differs from Libor end date?
Consider a date sequence
\begin{align*}
0 \leq t_0 \leq T_s < T_e < T_p,
\end{align*}
where $t_0$ is the valuation date, $T_s$ is the Libor start date, $T_e$ is the Libor end date, and $T_p$ is ...
- 21.2k
5
votes
Difference between OIS Rate and Risk-Free Rate
RFR (risk free rate) is the current acronym ISDA, central banks and regulators are pursuing to signify and politicise the transition from IBOR, which has been dogged by rigging scandals.
OIS (...
- 11.2k
5
votes
Accepted
Uncollateralised trades in Libor transition
Two replacements for the 3M Libor curve are possible:
Construct a new 3M Swap discounting curve by adding spreads on top of the SOFR curve. These spreads can be calibrated on uncollateralized 3M SOFR ...
- 828
5
votes
Is SOFR to replace LIBOR or Fed Fund Rate or both
SOFR was never meant to take USD LIBOR's role, as USD LIBOR reflects unsecured funding (and is credit sensitive).
An index like BSBY, on the other hand, can. BoA just started issuing FRNs linked to it....
- 5,133
4
votes
Accepted
6 month curve from 3 month forward rate agreements
No, you can't. You can never deduce the 3M/6M basis spread from 3 month instruments alone.
If you consider the OIS curve riskless, you can interpret the 3 month curve as riskless rate + additional ...
- 828
4
votes
What does LIBOR really represent?
Many major currencies/money markets have both an onshore money market and an offshore market. London is the offshore market for the USA. All major US banks have a branch in London. Historically this ...
- 11.6k
4
votes
A libor curve VS A 3-month or 6-month libor curve
There are a lot of intricacies involved, and I'll focus on high-level stuff.
Let's go back to the basics. If we have the 3-month LIBOR rate and the 6-month LIBOR rate, can we calculate the 3-month ...
- 11.8k
4
votes
Accepted
Collateralized Interest Rate Swap
Collateralised means that when the IRS is negatively valued (i.e. a liability) for one of the counterparties then they post collateral to the other respective counterparty (i.e. the asset holder) to ...
- 11.2k
4
votes
Properly interpreting LIBOR curves?
Interest rate derivative trading relies on curves. The LIBOR rate, be it 1month, 3month, 6month etc is published and determined every day but derivative contracts continue to speculate on what futures ...
- 11.2k
4
votes
Accepted
Total Return Swaps and Borrow Cost Relationship
These total return swaps are basically funding trades.
The seller of total return is putting the risk on their balance sheet. In order to pay the total return to the buyer of total return, the ...
- 6,652
4
votes
Accepted
Why is Overnight LIBOR lower than BoE Base Rate?
IBOR (Interbank Offered Rate) and OIS (Overnight Index Swap) are two fundamentally different forms of published interest rates. IBOR is calculated as an average of interest rate submissions from a ...
- 11.2k
4
votes
How to do simultaneous dual curve bootstrapping?
It's done in 2 steps:
1) First you bootstrap OIS curve independently from Libor curve, get OIS discount factors
2) Then use these to bootstrap Libor curve (using OIS discount factors instead of ...
- 861
4
votes
LIBOR Quoting Conventions and Swap Pricing
In a vanilla swap, the first floating rate is in fact already known. So a swap today will have start date t+2 and todays fixing for the floating leg.
In QuantLib, when you supply a fixing, you have to ...
- 5,845
4
votes
Accepted
DV01 on LIBOR vs. SOFR basis Swaps
I will try to make a more general suggestion that doesn't depend on SOFR, EONIA, LIBOR, cross-currency basis, etc, but applies all all linear interest rates products. Sorry if I may be digressing.
You ...
- 12.7k
4
votes
Accepted
Forward starting zero-coupon bonds
$Z(t_0,t_1,t_2)$ is the $t_1$-forward price of the ZC bond with maturity $t_2$, as of $t_0$. We have:
$$ Z(t_0,t_1,t_2) = E_{t_0}^{t_1}[Z(t_1,t_2)]\not= Z(t_1,t_2).$$
With a not-trivially stochastic ...
- 5,133
4
votes
Uncollateralised trades in Libor transition
To add to above answer, this GARP article is summarizing recent work on new benchmark indices that attempt to address what Libor was meant to ('fairly') cover, but RFR’s don't, namely (term, ...
- 5,133
4
votes
Constructing a USD LIBOR curve
Indeed, cash instruments go out to 12 months. Beyond 12 months, you can use swap rates, as you said, but up to 5 years you're better off using quotes for exchange-traded futures whose underlying is ...
- 12.7k
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