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Rethinking Valuation and Pricing Models by Greg N. Gregoriou, Christian Hoppe, Carsten Wehn

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9

The Widening of the BasisNew Market Formulas for Swaps, Caps and Swaptions

Fabio Mercurio

731 Lexington Avenue, New York, NY 10022, Bloomberg

Chapter Outline

9.1 Introduction

The 2007 liquidity crisis widened the Libor–overnight indexed swap (OIS) basis. Market rates that used to be consistent with each other suddenly diverged. For instance, the forward rates implied by two consecutive deposits became different than the corresponding quoted forward rate agreement (FRA) rates or forward rates ...

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