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I understand that now the discounting standard has migrated from Libor to OIS for collateralised trades, and I can understand why this would be important for a portfolio of rates derivatives?
However would a change of discounting regime be significant for (unfunded) credit derivatives? All these instruments show small/negligible IR01s compared to spread DV01s. So why would switching the discounting curve be significant? |
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| I presume that a choice of discounting is significant for all derivatives contracts that have a meaningful PV. |
Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness... |
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OIS is the closest proxy to risk-free interest rate. Hence, You could value your non-collateralized deals by discounting the cashflows with OIS rate to get the "pure" price. Then, by adding CVA(BVA) charge you would obtain the "risky" price.
If you discounted with Libor rates instead - you'd be automatically including default risk charge of a Libor panel bank, which might or might not be relevant to your deal.
The MtM of your contract would change when you switch from Libor to OIS discounting, but not necessarily a lot. I think the main difference between Libor & OIS discounting would be the Greeks of your deal: in times of liquidity crunch, you'd have jumps if you discount with Libor, while OIS rates tend to be much smoother.
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