Dealing with funding on uncollateralised swaps
Many banks are now using their own cost of funding as a discount rate when pricing non-collateralised swaps trades. How are banks dealing with the difference in funding rates when quoting derivatives prices, and could this influence a client’s choice of dealer? By Christopher Whittall
Derivatives pricing has never been simple, but there were a few constants people used to be able to rely on. One of the most fundamental was the use of Libor as a discount rate to price derivatives trades. The financial crisis has caused this assumption to be thrown out of the window. The majority of banks now recognise that the overnight indexed swap (OIS) rate should be used to discount future cashflows on collateralised swap transactions (Risk March 2009, pages 19–22). Meanwhile, non
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