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 ...
  • 487
11 votes

Why do we discount in ois and not treasuries

There are two parts to this question: 1) Is OIS a good risk-free proxy? and 2) Why is OIS used to discount cash flows of derivatives. First, overnight indexed swaps, in the US, are indexed to the Fed ...
  • 10.9k
9 votes
Accepted

Cheapest-to-deliver (CTD) discount curve

Collateral posted in currency XYZ is remunerated at $\text{OIS}_{\text{XYZ}}$, which translates, using the XYZUSD basis, into a synthetic USD rate $\text{OIS}_{\text{USD}}^{\text{XYZ}} = \text{OIS}_{\...
9 votes
Accepted

Quantlib python dual curve bootstrapping example

I reproduce the Ametrano-Bianchetti paper on dual-curve bootstrapping in Python with QuantLib in a chapter of the QuantLib Python Cookbook. (Note: I'm not sure what the etiquette is about plugging ...
9 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 ...
  • 4,962
7 votes

Why is CSA currency OIS rate used in discounting instead of local currency OIS?

The problem here is that your market is not arbitrage-free: JPY OIS = 10% per day, flat USD OIS = 0% per day, flat USDJPY spot = 100 USDJPY Forward for tomorrow = 100 A quick sense check ...
  • 487
7 votes
Accepted

Libor transition: Building SOFR discount curve

OIS Discounting: First note that we already discount using USD OIS rates, but these would be OIS rates constructed from USD OIS Swaps linked to the Effective Federal Funds Rate (EFFR). In other words, ...
  • 5,366
6 votes
Accepted

Curve Euribor - Euribor 3M

It is incorrect to use 1m euribor or O/N euribor in a 6m Euribor forward curve. You should only use instruments based on 6M euribor, such as 1x7 FRA, 6x12 FRA or swaps v 6m Euribor, as you have done ...
  • 304
6 votes

CSA discounting vs OIS discounting

"CSA discounting" does not give you a lot of information: it just means the collateralisation of the trade follows the rules agreed upon between both parties in the Credit Support Annex. But you don't ...
  • 487
5 votes
Accepted

How were OIS discount curves built before long-term OIS were liquid?

The ois curves were (and still are) primarily build from adding together (a) interest rate swap rates and (b) Fed Funds/Libor basis swaps. For example, if 10yr swaps are 2.0%, and 10yr fF/libor is -...
  • 14.3k
4 votes
Accepted

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 ...
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 ...
  • 8,099
4 votes
Accepted

Why is it desirable to receive fixed on a zero coupon swap, and undesirable to pay fixed on a zero coupon swap?

I notice you mention GBP. This effect is particularly apparent there since a large number of insurance, pension and asset management companies like to trade ZCS. They do this because the forward risk ...
  • 8,099
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 ...
  • 816
4 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....
  • 5,028
4 votes

How to account for the credit spread ( e.g. LIBOR + 2%) when using the Multicurve Methodology in valuing a Swap

1 ) Spread is for fwd only 4 ) Discounting is SOFR in any case (if using dual curve). See here for some details. That said, FF OIS still exists, but even this curve is discounted by SOFR and applies &...
  • 4,962
3 votes

How do I value uncollaterised swaps?

An uncollateralized swap transaction should be valued at its own funding rate, which in practice means the bank unsecured funding rate, for instance approximated as 3M Libor. Alternatively use the OIS ...
3 votes
Accepted

Lattice pricing of derivatives under multi curve framework (OIS and LIBOR)

There are many resources describing how to build a trinomial tree for the Hull & White model (for instance http://www-2.rotman.utoronto.ca/~hull/downloadablepublications/TreeBuilding.pdf), and ...
3 votes
Accepted

ESTER replacement for EONIA/EURIBOR

I believe that Eonia can still be used for discounting derivatives after 2020. Article: https://www.risk.net/derivatives/5848051/esma-eonia-can-be-used-in-csas-after-2020 If it becomes illiquid, ...
  • 14.3k
3 votes
Accepted

Dual Curve Bootstrapping - When to OIS discount?

Modern curve building methodologies, certainly implemented in top tier fixed income trading houses, use a simultaneous non-linear solver to construct all curves at once. Essentially the procedure is: ...
  • 8,099
3 votes

CSA discounting vs OIS discounting

OIS discounting is a subset of CSA discounting... technically they are not the same thing. CSA actually stands for Credit Support Annex, which is an Annex to your ISDA agreement with your trading ...
  • 193
3 votes

Dual discounted forward curve

Which currency are you looking at ? Say that your 1y swap would have yearly fixed payments vs 3M floating payments. Your 1.5y swap would probably have: a fixed payment 6m after effective date and ...
3 votes
Accepted

One Way CSA Agreements

First of all, it seems that you are solely concerned about the Funding Valuation Adjustment (FVA) here, and not CVA; Sovereigns have credit risk which should also be valued here given they would not ...
  • 487
3 votes

Why is CSA currency OIS rate used in discounting instead of local currency OIS?

you have a missing element in your data - you need to take into account xccy basis. when you do so, then you would get the same valuation in both methods. the key is to remember that since your ...
3 votes

Why is CSA currency OIS rate used in discounting instead of local currency OIS?

To expand on Marcino's correct appraisal of the matter: arbitrage was introduced with the 4 pieces of market data. i.e. JPY OIS = 10% per day, flat USD OIS = 0% per day, flat USDJPY spot = 100 ...
3 votes

When a bank enters a swap with a counterparty, when does it decide to use a OIS curve as its CSA Term, versus a counterparty specific "CSA Curve"?

To trade a swap counterparties must have an ISDA Master Agreement drawn up and signed between themselves. If collateral is to be exchanged that agreement will also contain a section called a CSA: a ...
  • 8,099
3 votes
Accepted

Recommended Instruments (and sources) for Constructing Money Market Yield Curves

A plethora of instruments, a menagerie of curves Different instruments are traded in different ways, and relate to a collection of curves. Floating rate instruments depend on some index in order to ...
  • 3,619
3 votes
Accepted

What is the difference between a cleared interest rate swap and a OTC interest rate swap with collateral in theory

For both cleared and OTC swaps you need to post margin. If you are delivering cash then you will receive OIS in generally in either case. As OTC trades are bespoke you might have a different ...
  • 2,458
3 votes
Accepted

The exact mechanics of USD OIS Swaps: SOFR, EFFR & Libor cessation

I try to keep your enumerated structure yet address the points you edited into the question: (i) I only know of USD OIS referencing the EFFR and the SOFR (ii) My perception is that EFFR als float leg ...
  • 583
3 votes

The exact mechanics of USD OIS Swaps: SOFR, EFFR & Libor cessation

I think a little clarity is needed here. A swap means exchanging A for B. Swaps trade on anything and everything. You can trade IOS/BBA Muni swaps, you can trade a swap linked to the gold ...
  • 2,458

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