Nov 25, 2014

Swap Pricing at its Core: OIS Discounting and Curve Construction

Since July 2013 when the Financial Accounting Standards Board (FASB) issued guidance permitting firms to use the Fed Funds Effective Swap Rate (Fed Funds rate), or Overnight Index Swap (OIS) rate for derivatives discounting both buy- and sell-side firms, have faced complex challenges in terms of the actual adoption and use of OIS discounting for pricing collateralized deals.

It's a daunting challenge when faced with having to rethink one's entire interest rate pricing framework from its basic concepts, especially when accurate OIS curve construction lives at its core. In fact, the technical aspects of OIS discounting and curve construction are absolutely critical to ensure accurate valuation, pricing and risk outputs.

Increasingly, we are talking to practitioners with outstanding questions related to OIS discounting and the particularities of curve construction in both the single-currency and cross-currency worlds. So, why does there continue to be so many questions when moving to this new benchmark? We’ve come to realize that while accurate and adequate curve construction is key to this equation the fundamentals still need to be assessed including:

  • Curve stripping (OIS, multi-curve surface (1m, 3m, 6m, etc.), XCCY curves)
  • Volatility surfaces (from Black-Scholes vols to premiums)
  • Modeling and pricing (curve + spread)
  • Calibration
  • Risk management valuations

To learn more about the recent paradigm shift in derivative valuation practices from single curve LIBOR discounting to a dual curve/multi-curve approach, as well as best practices and important considerations in implementing an OIS discounting approach - Watch the OIS Discounting - Valuation Approached Re-Examined session from the OIS Master Class virtual seminar series presented by PRMIA and Numerix.

Additionally, in a featured case study example learn how Toyota Financial Services (TFS), the worldwide financial services operations for Toyota Financial Services Corporation successfully shifted to OIS as its standard funding rate.

Blog Post - Jun 23, 2011

Improving Risk Management and Transparency for Structured Products

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