Credit goes to forward rate spreads

Term structure of interest rates explained with a credit model


Since the onset of the financial crisis in July 2007, the spreads between expected fixings based on benchmark rates, like Libor and Euribor, and expected overnight indexed swap (OIS) rates have been significant, so it became necessary to involve new methods in the pricing of interest rate derivatives (Bianchetti 2010; Fujii, Shimada and Takahashi 2010; Mercurio 2009; Morini 2009; Piterbarg 2010). A typical picture of this new regime is displayed in figure 1. The figure shows the spreads betwe