October 14th, 2010, 1:52 pm
1) We don't choose LIBOR. In fact, the mkt increasingly is gravitating towards the OIS rate. Moreover, be aware that just because the O/N rate (FF effective) is published by the Fed, that doesn't mean it's risk-free. It's still lending O/N unsecured.2) There is a mkt for O/N cash. It's not really traded on an exchange, but that doesn't matter. Derivatives based on OIS rates, such as OIS swaps, are traded in the OTC mkt actively.