Interest Rates Benchmark Reform and Options Markets

Abstract

We examine the impact of interest rates benchmark reform and upcoming Libor transition on options markets. We address various modelling challenges the transition brings. We specifically focus on the impact of the clearing houses' discounting switch on swaptions, and the consequences of Libor transition on Libor-in-arrears swaps, caps, and range accruals as typical representatives of a very wide range of Libor derivatives.

Keywords: interest rates benchmark reform, Libor transition, discounting, swaps, swaptions, caps, Libor-in-arrears, range accruals, interest rates

JEL Classification: C61, G13, G15, G18, G21, C51