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12 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 ...
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  • 487
10 votes

Why is USD LIBOR used for USD denominated securities?

Why does USD based security valuation have to give a thing about what London Banks think? Your question is based on false premises: the USD Libor is not determined by polling London based banks as ...
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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 ...
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  • 2,110
9 votes
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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 ...
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  • 4,493
8 votes
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Is this an inconsistency between Swap and LIBOR?

Firstly, understand that the 1y Libor is not useful here; the swap is 2 6-month periods, which will each fix on 6m Libor. These days, the *ibor fixings at different tenors are essentially separate, ...
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  • 3,589
7 votes
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Why is USD LIBOR used for USD denominated securities?

The importance here is that it actually does not matter in what time zone or market the libor rates are set. Key is that it is supposed (!!!) to be a gauge at what rate contributing banks could borrow ...
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  • 14.1k
6 votes

Seeming arbitrage in excess reserves

Federal Home Loan Banks also hold reserves, but are not eligible to earn IOER, so they lend the cash into the fed funds market at a rate below IOER. U.S. branches of foreign banks, who are eligible to ...
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  • 61
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 ...
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  • 61
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 ...
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  • 2,117
6 votes
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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 ...
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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 ...
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  • 6,743
5 votes
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Libor Market Model: numeraire change

EDIT: I changed the answer to have it more on topic. Summary It boils down to Mark Joshi's answer. I wanted to add something more. Answer A probability measure $Q1$ and a numeraire $N1(t)$ are ...
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  • 506
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 ...
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  • 13.9k
5 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. ...
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  • 13.9k
5 votes
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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 ...
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  • 8,047
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 (...
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  • 8,047
5 votes
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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 ...
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5 votes
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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- ...
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  • 13.9k
4 votes

Basic LIBOR curve question

Libor rates include credit risk. It is riskier to make a 6m loan than two 3m loan. So the 6M Libor curve is not the same as the 3M one. Their difference is the basis spread. When using a short rate ...
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  • 3,826
4 votes
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Libor OIS basis swap equation

An OIS, or Overnight Index Swap, is an interest rate swap whose floating leg payments are calculated as a geometric average of the daily fixings of some underlying O/N or T/N index (these indices are ...
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4 votes

forward vs spot simply-compounded spot interest rate

The flaw is $L(T,S)$ is a future spot rate that is determined at time $T>t$ and unknown at present. It is correct that $$F(t,T,S)=\frac{1}{S-T}\left[\frac{P(t,T)}{P(t,S)}-1\right] \iff P(t,S)(S-...
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  • 3,250
4 votes
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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 ...
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  • 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 ...
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  • 9,462
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 ...
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  • 10.9k
4 votes
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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 ...
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  • 8,047
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 ...
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  • 8,047
4 votes
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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 ...
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  • 5,295
4 votes
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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 ...
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  • 8,047
4 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 ...
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  • 20.4k
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 ...
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