Transition to a different world is difficult, more difficult than inventing a better world from scratch. In this episode, I’m looking at the transition. There are probably more questions than answers. But, as you know, In mathematics, the art of posing a question is more important than the art of solving one. Georg Cantor, 1867. Is transition important? Valuation of flow derivatives, and in particular Libor linked derivatives, and the associated collateral discounting framework are vanilla in name but certainly not simple if you have to implement them from first principles. The impact of features that were considered before the Great Financial Crisis (GFC) as “details” are nowadays very significant. You can not simply replace one benchmark by another and hope for the best. There are numerous items to take care of, like valuation framework, non linear effects, convexity adjustment, risk management strategies, liquidity, regulatory impacts, etc. I don’t know if, from a purel...
