Marc Henrard - Multi-curve framework

Following my blog post on " ICE Swap rate fallback? ", Risk.net has published an article on the question titled Evolution or extinction: Ice swap rate’s post-Libor quandary (subscription required). I'm expecting more articles on the subject in the coming weeks. Some minor points about the article: A fixed income trading head is quoted to have said " It’s going to be very difficult and shows that benchmark reform is a much heavier lift than anyone estimated. I agree with the "difficult" part, but not with the "anyone". Maybe it is heavier than most estimated, but to my opinion the "anyone" term is inappropriate. Those issues have been anticipated and documented from day one by some. I will just refer to my July 2017 post LIBOR is dead, the Game of Thrones can start! The article also indicated: " It is understood that the benchmark’s administrator – Ice Benchmark Administration – discussed the issue with industry participants ...

This could be classified as another episode of finance fiction! This blog starts with a couple of seemingly unrelated paragraphs and then continues in relating them in a way to improve the market infrastructure. One of the market developments in the last years has been the generalization of the Variation Margin (VM) and Initial Margin (IM). The goal of that framework is to reduce the credit risk in derivatives. A couple of years ago, the Quant of the Year award was related to a work on the subject of CVA exposure spikes in presence of Variation and Initial Margin. The underlying article, titled Does initial margin eliminate counterparty risk? (subscription required) by Leif Andersen, Michael Pykhtin and Alexander Sokol was published on Risk.Net in May 2017. In some sense, the article indicated that the margin framework, that is working very well in theory, fails in part in practice. The failure is due to the (large) payment of coupons that are taken into account by the VM only o...

Three productive days at QuantMinds International . My boardroom discussion on "LIBOR fallback: a quant perspective" was well attended and attracted a lot of comments. A rest day in sunny Vienna starting with a reinvigorating breakfast at the Sacher Eck !

In the previous episode of my "making money on LIBOR fallback" (listed at the bottom of the post), I looked at a specific position that I proposed just after the 26 November 2018 announcement of the ISDA consultation results. The position is still in-the-money, but with very little changes over the last month. So for this episode, I will simply present graphs related to similar positions that could have been taken some month ago. All of them are making money, but the money making machine has slowed down in the last month. The next opportunity to make money will probably be when ISDA Benchmark Committee decides on the exact details of the spread computation methodology (look-back period, mean/median, transition period). I looked at numbers for four indices: USD-LIBOR-3M, USD-LIBOR-6M, GBP-LIBOR-3M and GBP-LIBOR-6M. For each index, I first computed the running mean/median for two possible look-back periods (10 and 5-year period) of the spread between the (forward-looking) L...

In two weeks time, on Sunday 26, we have regional, general and European elections in Belgium. The polling stations are manned by electors, not by government official or civil servant. This is to make sure that democracy is democracy. The assessors of each polling station are drawn randomly from the list of electors of that station. The draw is done by a judge. Voting and assessor duty are mandatory in Belgium. The president of each station is, in theory, also drawn randomly. Except that the draw is "slightly" biased to make sure that the president has some competencies and that the stations perform correctly. In a Monte Carlo setting, this would be a draw with "Importance Sampling". It is the third election in a row that I'm on president duty. There are roughly 1,000 voters for each polling station. If it was a true random draw and each draw was independent, it would be one "chance" in a billion to be president three times in a row. To come bac...

Le jour où le crime se pare des dépouilles de l’innocence, par un curieux renversement qui est propre à notre temps, c’est l’innocence qui est sommée de fournir ses justifications. Albert Camus L'Homme révolté (1951)