Let's keep this simple. In essence, all deals between ISDA broker dealers are collateralized ... If A has a deal with B which is worth $1 (to A), then bank B has to post collateral for $1 with bank A. By ISDA rule, bank A pays interest at the OIS rate to bank B on this dollar. Thus, the discount rate used to value the deal has to be the OIS rate ... if the rate was higher, then the $1 would gain value (and hence not be worth $1) ... and if the rate is less than the OIS rate, it would lose value (and hence not be worth $1). So all fully collateralized derivatives must be discounted at the ccy's OIS rate. One can then strip common derivatives (basis swaps, xCCY basis swaps etc.) to get the appropriate discount factors for non-collateralized legs or legs collateralized in other ccy's. These are all mkt based prices; there is no room for theoretical calculations of risk, default risk, etc ...

Why CDS and SWAP curves are usually used to price interest rate derivatives instead of other curves for example ZCB  curve or risk free curves?

Why CDS and SWAP curves are usually used to price interest rate derivatives instead of other curves for example ZCB  curve or risk free curves?


1) you don't need CDS curve to price IR derivatives
2) Swap rates better reflects credit risk for OTC derivatives. Any curve can be expressed in the Par space (Swap curve), in the Spot space (zero coupon), forward space and yield space (for bonds). They can convert to each other. You can not use swap curve directly to do the discounting and pricing, you need to strip it to get the zero coupon curve for discounting.

Let's keep this simple. In essence, all deals between ISDA broker dealers are collateralized ... If A has a deal with B which is worth $1 (to A), then bank B has to post collateral for $1 with bank A. By ISDA rule, bank A pays interest at the OIS rate to bank B on this dollar. Thus, the discount rate used to value the deal has to be the OIS rate ... if the rate was higher, then the $1 would gain value (and hence not be worth $1) ... and if the rate is less than the OIS rate, it would lose value (and hence not be worth $1). So all fully collateralized derivatives must be discounted at the ccy's OIS rate. One can then strip common derivatives (basis swaps, xCCY basis swaps etc.) to get the appropriate discount factors for non-collateralized legs or legs collateralized in other ccy's. These are all mkt based prices; there is no room for theoretical calculations of risk, default risk, etc ...

The original question is 

Why CDS and SWAP curves are usually used to price interest rate derivatives instead of other curves for example ZCB  curve or risk free curves?

i.e. if we price a USA T-coupon bond why we should apply OIS rate to price it. If we have single currency USA IRS why we should use OIS rate to calculate its PV? Of course ISDA rule is an argument to use this rate for calculation. Nevertheless why can be transfer to ISDA practice too,

Why CDS and SWAP curves are usually used to price interest rate derivatives instead of other curves for example ZCB  curve or risk free curves?


1) you don't need CDS curve to price IR derivatives
2) Swap rates better reflects credit risk for OTC derivatives. Any curve can be expressed in the Par space (Swap curve), in the Spot space (zero coupon), forward space and yield space (for bonds). They can convert to each other. You can not use swap curve directly to do the discounting and pricing, you need to strip it to get the zero coupon curve for discounting.

Let's keep this simple. In essence, all deals between ISDA broker dealers are collateralized ... If A has a deal with B which is worth $1 (to A), then bank B has to post collateral for $1 with bank A. By ISDA rule, bank A pays interest at the OIS rate to bank B on this dollar. Thus, the discount rate used to value the deal has to be the OIS rate ... if the rate was higher, then the $1 would gain value (and hence not be worth $1) ... and if the rate is less than the OIS rate, it would lose value (and hence not be worth $1). So all fully collateralized derivatives must be discounted at the ccy's OIS rate. One can then strip common derivatives (basis swaps, xCCY basis swaps etc.) to get the appropriate discount factors for non-collateralized legs or legs collateralized in other ccy's. These are all mkt based prices; there is no room for theoretical calculations of risk, default risk, etc ...

The original question is 

Why CDS and SWAP curves are usually used to price interest rate derivatives instead of other curves for example ZCB  curve or risk free curves?

i.e. if we price a USA T-coupon bond why we should apply OIS rate to price it. If we have single currency USA IRS why we should use OIS rate to calculate its PV? Of course ISDA rule is an argument to use this rate for calculation. Nevertheless why can be transfer to ISDA practice too,

There isn't anyone talking about using OIS to "price" USTs.  Pat already explained to you, why, mechanically, OIS is the right rate to use (hint: it's the funding rate for a "marginal" mkt participant).

Could you pls stop your silly ignorant comments?  To comment meaningfully about its flaws, you need to have a basic understanding of how the system currently operates.  This understanding isn't something you possess, which means you are not qualified to offer your opinions.