re : choosing the riskfree rate dear all ,
i completeley agree with ben that treasuries are the most liquid and reliable
benchmarks . i also think that fmas have their own advantages and
disadvantages .
however , it looks like it would be very difficult for us to avoid using libor
as benchmark - at least to price anything related to capital markets ( for
example , credit default swaps ) . our prices will always be different from
that on capital markets if we use benchmarks different from the market .
as a half - way solution we can have different benchmarks - for example , use
anything , that we decide is closest to risk - free , to value products
significantly different from that priced on capital markets , and libor for
everything priced on capital markets .
we can adjust by manipulating other coefficients ( event , liquidity ,
recovery ) for our purposes , but it looks like benchmark should be libor .
to avoid negative default probabilites ( for highly rated reference entities )
we can add cost fo repo and haircuts ( as all bankers do ) .
let us continue our discussion on this .
slava
benjamin parsons
13 / 03 / 2000 20 : 07
to : bryan seyfried / lon / ect @ ect , martin mcdermott / lon / ect @ ect , viacheslav
danilov / lon / ect @ ect , stuart ffoulkes / lon / ect @ ect , eklavya sareen / lon / ect @ ect ,
tomas valnek / lon / ect @ ect , john metzler / lon / ect @ ect , simon brooks / lon / ect @ ect ,
konstantin malinovski / lon / ect @ ect
cc : vasant shanbhogue / hou / ect @ ect , vince j kaminski / hou / ect @ ect , steven
leppard / lon / ect @ ect , jitendra patel / lon / ect @ ect , william s
bradford / hou / ect @ ect , harry arora / hou / ect @ ect
subject : choosing the riskfree rate
dear all ,
following on from the discussions had with vince et al a few weeks ago ,
regarding the problems inherent in using treasuries as our benchmark riskfree
curve , i ' ve written the attached short document . my preliminary conclusions
are as follows :
recent turmoil in the treasury market mostly hit 10 and 30 - year bonds .
treasuries are still the most liquid curve , and that used by banks for
benchmarking risky debt .
there is a considerable a liquidity / scarcity premium inherent within the
corporate - treasury spread , which we are not taking into account . more
accurate measurement of this premium should allow us to calculate bankruptcy
prices based on treasuries , which are consistent with the market .
all further comments are welcome of course .
regards
ben
re : choosing the riskfree rate
dear all ,
i completeley agree with ben that treasuries are the most liquid and reliable
benchmarks . i also think that fmas have their own advantages and
disadvantages .
however , it looks like it would be very difficult for us to avoid using libor
as benchmark - at least to price anything related to capital markets ( for
example , credit default swaps ) . our prices will always be different from
that on capital markets if we use benchmarks different from the market .
as a half - way solution we can have different benchmarks - for example , use
anything , that we decide is closest to risk - free , to value products
significantly different from that priced on capital markets , and libor for
everything priced on capital markets .
we can adjust by manipulating other coefficients ( event , liquidity ,
recovery ) for our purposes , but it looks like benchmark should be libor .
to avoid negative default probabilites ( for highly rated reference entities )
we can add cost fo repo and haircuts ( as all bankers do ) .
let us continue our discussion on this .
slava
benjamin parsons
13 / 03 / 2000 20 : 07
to : bryan seyfried / lon / ect @ ect , martin mcdermott / lon / ect @ ect , viacheslav
danilov / lon / ect @ ect , stuart ffoulkes / lon / ect @ ect , eklavya sareen / lon / ect @ ect ,
tomas valnek / lon / ect @ ect , john metzler / lon / ect @ ect , simon brooks / lon / ect @ ect ,
konstantin malinovski / lon / ect @ ect
cc : vasant shanbhogue / hou / ect @ ect , vince j kaminski / hou / ect @ ect , steven
leppard / lon / ect @ ect , jitendra patel / lon / ect @ ect , william s
bradford / hou / ect @ ect , harry arora / hou / ect @ ect
subject : choosing the riskfree rate
dear all ,
following on from the discussions had with vince et al a few weeks ago ,
regarding the problems inherent in using treasuries as our benchmark riskfree
curve , i ' ve written the attached short document . my preliminary conclusions
are as follows :
recent turmoil in the treasury market mostly hit 10 and 30 - year bonds .
treasuries are still the most liquid curve , and that used by banks for
benchmarking risky debt .
there is a considerable a liquidity / scarcity premium inherent within the
corporate - treasury spread , which we are not taking into account . more
accurate measurement of this premium should allow us to calculate bankruptcy
prices based on treasuries , which are consistent with the market .
all further comments are welcome of course .
regards
ben