Short note on long-term repos
The market infrastructure for interbank lending and derivatives has dramatically changed over the last ten years. The interbank lending is done now mainly on a secured basis. Derivatives are margined daily with variation margin guaranteeing the full present value of the trades. The world of interest rate benchmarks is also rapidly changing with the possible discontinuation of the IBOR benchmarks that have reigned on the benchmark kingdom over the last 30 years and the emergence of secured rate overnight benchmarks.
All derivative users are now well aware of the difference between overnight-indexed swap (OIS) rates and term LIBOR deposit rates even if its discovery may have been sudden to some market participants in 2007.
When we combined the secured term lending, the collateralised derivatives and the secured benchmark, what is left of the OIS-term deposit difference? This is the question I try to answer in a brief note now available on SSRN at https://ssrn.com/abstract=3258690
Using simple no-arbitrage strategy with daily hedging I prove that the collateralised OIS fix rate when the underlying benchmark is an overnight repo is equal to the term repo rate on the same period.
All derivative users are now well aware of the difference between overnight-indexed swap (OIS) rates and term LIBOR deposit rates even if its discovery may have been sudden to some market participants in 2007.
When we combined the secured term lending, the collateralised derivatives and the secured benchmark, what is left of the OIS-term deposit difference? This is the question I try to answer in a brief note now available on SSRN at https://ssrn.com/abstract=3258690
Using simple no-arbitrage strategy with daily hedging I prove that the collateralised OIS fix rate when the underlying benchmark is an overnight repo is equal to the term repo rate on the same period.
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