Change of benchmark overnight index is a difficult task
In the book, I indicated why I dislike the term “OIS discounting” (OIS = Overnight Indexed Swap) as it hides the complexity of the valuation process and the numerous hypothesis and results required to achieve the valuation formula. The correctness of the approach depends on a number of market conventions and practice, unstable to my opinion. Unstable in the physical sense, that a small perturbation to the situation can destroy the whole process, not only move it slightly. This blog entry is written in reaction of the Risk article titled OIS rate change easy to absorb, says ISDAs O'Connor (subscription required). As you can guess from the introduction, I disagree with the “easy” part of the title and I believe the term “OIS” used in the title is as misleading as the one used in “OIS discounting”. If I understand correctly the article, there is a General Collateral (GC) overnight index and some suggestion, in particular by the US Federal Reserve, to change the standard index fro...