The price is wrong
As the basis between Libor and overnight index swap rates ballooned during the credit crisis, banks were forced to reassess methods for pricing collateralised and uncollateralised derivatives trades. The result is a move towards a new market standard in pricing derivatives backed by collateral. By Christopher Whittall
The turmoil in financial markets over the past two-and-a-half years has led dealers to rethink the way they price trillions of dollars worth of derivatives. Since mid-2007, unprecedented volatility has caused banks to move away from discounting future derivatives cashflows using Libor. Instead, dealers now say cashflows in collateralised trades should be discounted at a relevant overnight index swap (OIS) rate, while future cashflows in uncollateralised trades should be discounted at the rate at
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