LIBOR vs. OIS: The Derivatives Discounting Dilemma

The Journal of Investment Management, Forthcoming

Rotman School of Management Working Paper No. 2211800

27 Pages Posted: 4 Feb 2013 Last revised: 11 Apr 2013

See all articles by John C. Hull

John C. Hull

University of Toronto - Rotman School of Management

Alan White

University of Toronto - Rotman School of Management

Date Written: April 1, 2013

Abstract

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

Hull, John C. and White, Alan, LIBOR vs. OIS: The Derivatives Discounting Dilemma (April 1, 2013). The Journal of Investment Management, Forthcoming; Rotman School of Management Working Paper No. 2211800. Available at SSRN: https://ssrn.com/abstract=2211800 or http://dx.doi.org/10.2139/ssrn.2211800

John C. Hull (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
(416) 978-8615 (Phone)
416-971-3048 (Fax)

Alan White

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-3689 (Phone)
416-971-3048 (Fax)

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