Model risk in the transition to risk-free rates
Transition is an opportunity to reduce multi-rate complexities, say Bakkar and Brigo
The transition from interbank offered rates (Ibors) to new risk-free rates (RFRs) has been heavily debated by policymakers, regulators and market participants over the past few years. It will be a massive undertaking, affecting hundreds of trillions of dollars’ worth of contracts. This will have to be managed carefully to avoid great disruption – not least from a modelling perspective.
Since the financial crisis, derivatives valuation has moved a long way towards incorporating multiple curves
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