The difference between forwards arrived at using OIS discounting and those arrived at using Libor discounting would vegas slots rewards itself be directly depend on the Libor-OIS spread curve.
Then the implied par rates would need to be slightly different between OIS discounting and Libor discounting.05 -0.
Because of this, the cashflows of the derivative should also be discounted with corresponding OIS rate.
Impact of the Credit Crisis on the Rates MarketAs the credit crisis unfolded, there were significant impacts on the structure and dynamics of the ratesmarket.The contributing banksare the same as those contributing to the Euribor index and the index is calculated and published by theEuropean Central Bank (ECB).Natural receivers of long-dated swaps could be net beneficiaries of a switch to OIS discounting.Which is available out to a 30y maturity.For Euros, the OIS swap is indexed to the Eonia rate.3m Libor swap rates may be adjusted by the Libor-OIS basis (both of which extend out to the 30y point) to arrive at par OIS rates.Hedging a receive-fixed Libor position would require entering a Libor-OIS spread tightener.
The widening of Libor-OIS spreads during the crisis of 2007-08 brought the discrepancy caused by using the Libor curve for discounting risk-free cash flows to the forefront (more on this discrepancy later).
In addition, regulatory initiatives such as Basel III and Solvency II, along with accounting rulessuch as ASC 820 (FAS 157) and IAS 39 have mandated more accurate counterparty risk valuation and e larger banks have led the evolution of valuing and managing counterparty credit risk.
And annually payable par rates for maturities greater than.
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Changing the discounting rate obviously implies that swap valuations must change.Credit and liquidity were ignored as their effects were minimal.An OIS curve is needed.The two discounting curves move closer.The floating leg is computed using the effective fed funds rate.