No forward-looking rates? No problem

A commonly used quant model could be the answer to the replacement of forward-looking Libor

As the industry prepares to take on the behemoth task of benchmark reform – labelled by some as a change as complex as Brexit – quants have started to wonder what the impact would be on interest rate models.

The new risk-free rates (RFRs) in various currencies – expected to replace Libor if or when the benchmark ceases after 2021 – are overnight rates, whereas Libor is a forward-looking term rate.

Industry consultations have shown a majority of derivatives market participants are leaning

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