QuoteOriginally posted by: MartinghoulAs far as I am aware, you have to answer this question by making a fundamental choice that everyone makes for themselves. There is no right answer.Thank you so much Martinghoul, I benefit quite a lot by reading your answers on many threads...Yes, I understand what you mean. But now it seems there is some inconsistency there:Let us say we have a list of market instruments (by recent market practice, it will be under OIS discounting?, hopefully...)Case I: (Assumption: the forward curve will be the same for all trades, and the forward curve is derived under OIS discounting)Given the market instruments, one constructs OIS curve and 3M forward curve (OIS)- For CSA trade, one obtains the par-swap-rate with OIS and 3M forward Curve (OIS), we are good- For the same trade but under no-CSA, one obtains the par-swap-rate with Funding Curve and 3M Forward Curve (OIS), let us say the funding curve is 3M libor. One can either use 3M Forward Curve (OIS) or re-build a 3M Libor discounting curve to be his/her funding curve. - However, in both cases, one should expect a little bps difference in the par swap rate compared with the CSA tradeCase II: (Assumption: assuming market rates for CSA and no-CSA trade are the same without considering CVA etc.)Given the market instruments, one constructs OIS curve and 3M forward curve (OIS)Given the same market instruments, one construct a Libor discounting curve and 3M forward Curve (Libor)One should NOT be surprised to see a 2-3 bps difference in the forward rate (under OIS or Libor) depending on the Libor/OIS spread and curve steepness.- For CSA trade, one obtains the par-swap-rate with OIS and 3M forward Curve (OIS), we are good- For the same trade but under no-CSA, one computes the par-swap-rate with Libor discounting curve (his/her funding curve), and 3M forward Curve (Libor)- For the two trades, since we build the curve by matching to the same set of market instruments, we expect same par-swap-rateSo hope I explain my problem. Is there some inconsistency in the two cases? getting so confused now...Thanks
Last edited by kelang
on March 2nd, 2012, 11:00 pm, edited 1 time in total.