I used to price Swaps.. Mark them to market and model their possible behavior over time T
using the LIBOR as the reference. I spent many hours building some sophisticated models using OVERNIGHT INDEX SWAPS rates. It took me a few years to understand the LIBOR rates.
Things I've learned.
Shady MTM happens in OTC derivatives markets. Since there is no exchange to be the counterparty, and often insurance is not fairly marked to market.
We used the Heath Jarrow and Morton's method or the LIBOR MARKET MODEL in many of our models..
Obviously, we are now changing to SOFR.
I expect some really shady things to happen in the OTC derivatives market.
- synthetic CDO
- Interest rate swaps
- Forward Rate Agreements
- Caplets and Floorlets on bonds
- Structured products
- Market structures changes
- New counterparty risk considerations?
Why is no one short CMBS by going long CDS?
Is it assumed the central banks will be the new RISK-TRANSFER from the banks and institutions with dirty paper now.
I have said this over and over.. The counterparty has been removed already as it's now the central banks taking on the counterparty risk.
Anyone have anything useful to add to this discussion?
We just will switch to SOFR now as the floating rate?
I would love a bond or fixed income expert to explain to me how to now Mark to market exotics. or bespoke products using SOFR as the float.
- https://www.bankofengland.co.uk/-/media/boe/files/statistics/yield-curves/yield-curve-terminology-and-concepts.pdf?la=en&hash=FB7E974604FAE37155E0E649C70B2F2AF3FDD4CF... (More)