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The LIBOR rate transition : On the implementation of transition approaches from Interbank Offered Rates to Risk-Free Rates and the corresponding value impact

Bos, K.E. (2019) The LIBOR rate transition : On the implementation of transition approaches from Interbank Offered Rates to Risk-Free Rates and the corresponding value impact.

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Abstract:This research is conducted with the aim to assess whether currently proposed transition approaches from IBORs towards risk-free rates are viable from a supervisor perspective. We propose a model to improve the currently preferred transition approach and we investigate the transition impact in terms of value transfer on linear and non-linear derivatives. Firstly, we identify the difference in characteristics of IBORs and the proposed risk-free rates which serve as alternative reference rates. Secondly, we evaluate the currently proposed transition methodologies by the International Swaps and Derivatives Association and apply the preferred methodologies to the risk-free rate for spread adjustment and transformation to a term rate. Subsequently, we develop a regression model to predict the corresponding Libor based on the adjusted risk-free rate and additional risk premium. We analyze furthermore if the regression model can be used to backfill historical data to overcome the practical implementation problem of the historical spread approach. Finally, we show that value transfer happens to linear and non-linear derivative contracts as a result of change in respectively level and volatility of the alternative reference rate.
Item Type:Essay (Master)
Clients:
EY, Amsterdam, Netherlands
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:31 mathematics, 83 economics
Programme:Industrial Engineering and Management MSc (60029)
Link to this item:http://purl.utwente.nl/essays/78362
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