Case Study: HAS LIBOR LOST ITS STATURE IN DERIVATIVES MARKETS?

Case Study: HAS LIBOR LOST ITS STATURE IN DERIVATIVES MARKETS?
What is the difference between LIBOR and OIS as benchmarks in valuing interest -rate swaps?
Is LIBOR a risk -free rate?
2. Value the interest -rate swap by relying on the data provided on the LIBOR and OIS rates. What differences do you find, and what might account for these differences?
3. Does the valuation of an interest-rate swap in particular, and derivatives in general, depend on who the counterparty is and whether the contract is collateralized?
In April 2016, a large U.S. proprietary trading group in New York, with a significant fixed-income portfolio, was debating what discount rate to use to value the group’s interest-rate swap portfolio.
The counterparties to these swaps were major banks, and the deals were collateralized. Criticisms about the use of the London interbank offered rate (LIBOR) as a benchmark for valuing these swaps were circulating, and there were reports that LIBOR was being manipulated. There was talk about an alternative, nearly “risk-free” reference rate that could potentially be launched during 2016. Was it time for the trading group to substitute some of its maturing LIBOR-based interestrate swaps with overnight index swaps?
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