The basis goes stochastic

The basis goes stochastic

Mathematica 8 Cos-Sin plot

Since August 2007, the basis between Libor and the overnight index swap (OIS) rate has expanded and become stochastic. Single interest rate curve modelling has become obsolete, and multi-curve models have been introduced to price interest rate derivatives (see, for example, Whittall, 2010). The market has settled on new valuation formulas for vanilla instruments, with natural modifications of the classic single-curve ones. But the pricing of non-vanilla options still has unsolved challenges,