LIBOR vs. OIS: The Derivatives Discounting Dilemma
The Journal of Investment Management, Forthcoming
27 Pages Posted: 4 Feb 2013 Last revised: 11 Apr 2013
Date Written: April 1, 2013
Traditionally practitioners have used LIBOR and LIBOR-swap rates as proxies for risk-free rates when valuing derivatives. This practice has been called into question by the credit crisis that started in 2007. Many banks now consider that overnight indexed swap (OIS) rates should be used as the risk-free rate when collateralized portfolios are valued and that LIBOR should be used for this purpose when portfolios are not collateralized. This paper examines this practice and concludes that OIS rates should be used in all situations.
Keywords: LIBOR, OIS, Derivatives, Discounting
JEL Classification: G21, G33
Suggested Citation: Suggested Citation