75 Pages Posted: 21 Feb 2010 Last revised: 23 Mar 2010
Date Written: February 18, 2010
The recent financial crisis caused dramatic widening and elevated volatilities among basis spreads in cross currency as well as domestic interest rate markets. Furthermore, the widespread use of collateral has made the effective funding cost of financial institutions for the trades significantly different from the Libor of the corresponding payment currency. In this presentation, after reviewing the implications of profit/loss for financial firms still using a textbook-style curve construction and an interest rate model, we will explain the consistent swap curve construction with all the basis spreads taken into account, and how to make all the reference rates stochastic with no-arbitrage conditions.
Keywords: Libor, Swap, Tenor, Yield Curve, Collateral, Overnight Index Swap, Cross Currency, Basis Spread, Market Model, HJM
JEL Classification: E43,G13
Suggested Citation: Suggested Citation
Fujii, Masaaki and Shimada, Yasufumi and Takahashi, Akihiko, On the Term Structure of Interest Rates with Basis Spreads, Collateral and Multiple Currencies (February 18, 2010). Available at SSRN: https://ssrn.com/abstract=1556487 or http://dx.doi.org/10.2139/ssrn.1556487
By Marc Henrard